When the first signs of inflation began to make themselves visible earlier this year, it was welcomed as a signal of strong economic recovery. Then, however, came the energy crunch, and now the two are comingling into a worrying trend. In the United States, the Labor Department reported the fastest consumer price increase since 1990 October. The figure came in at 6.2 percent, driven higher by, among other things, higher gasoline prices.
In China, prices of goods at the factory gate rose to a record high last month because of soaring energy costs. The world's biggest exporter suffered an arguably worse energy shortage than Europe this autumn, with supply so tight it led to factory closures and blackouts.
In Europe, media are reporting that Germany is facing the highest inflation rates in three decades because of higher energy prices. The situation is not much different in the rest of Europe either. Prices are climbing in tune with the price of energy, regardless of where this energy comes from.
"The surge in energy prices poses significant near-term risks to global inflation and, if sustained, could also weigh on growth in energy-importing countries," said the chief economist and director of the World Bank's Prospects Group, Ayhan Kose, as quoted by Reuters. The Group produces the World Bank's Commodity Markets Outlook.
Indeed, energy prices have invariably been a major driver of consumer prices. As such, they have also been a driver of inflation. Yet this time, it's all different. This time, the global economy is trying to get back on its feet after the devastation wrought on it by lockdowns in response to the coronavirus pandemic. And if inflation gets out of hand, this will become this much harder.
"Inflation hurts Americans pocketbooks, and reversing this trend is a top priority for me," President Biden said after the release of the consumer price index report yesterday, as quoted by Bloomberg.
"The largest share of the increase in prices in this report is due to rising energy costs," the president continued, adding, "I have directed my National Economic Council to pursue means to try to further reduce these costs, and have asked the Federal Trade Commission to strike back at any market manipulation or price gouging in this sector."
Inflation, which the Fed initially dismissed as "transitory", is becoming a real headache not only for the United States but also for much of the world, it seems, and it could threaten the recovery of the global economy. The question is, of course, how to bring energy costs down.
Normally, if prices reach a worrying level, OPEC would step in and ramp up production. This time, however, OPEC and its OPEC+ partners are sticking to their limited-supply guns in evidence of its belief that the recovery drive is stronger than inflation fears, at least for now.
The real question, therefore, is how long OPEC+ will continue with its policy of limited production ramp-up, especially as large consumers voice their displeasure with this policy and some, such as China last month, are buying less oil as a result of the price rise.
According to analysts from investment banks and the World Bank, oil supply will grow more markedly next year, and the price rally in energy will weaken, at least in fossil fuels. In renewable energy, prices are also higher because of the supply chain problems caused by the pandemic, which appear to be particularly stubborn and are seen lasting well into 2022. Inflation, in other words, will remain a serious concern, especially as central banks go ahead with stimulus tapering. Just how serious it will become yet remains unclear, but it would, once again, depend on oil supply.
By Irina Slav for Oilprice.com
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