According to data from the National Bureau of Statistics, my country's CPI rose only 0.4% year-on-year in March 2021. Although it has increased compared with the negative growth from January to February, it still falls within a relatively low range, far lower than the 3% indicator set in the government work report. However, lower CPI data does not mean that inflation concerns are no longer there. Global economists have serious differences in their views on whether the economy is facing inflation or deflation. Many mainstream research institutions believe that the risks of inflation still exist, but decision-makers, including the Federal Reserve, seem to be not worried about inflation.
The research in this article shows that the hidden concerns about inflation should be seen through the phenomenon. Judging from the comprehensive factors such as the price trend of basic commodities, global economic growth, global currency issuance, and domestic and foreign price trends, under the lower CPI data, the risk of inflation is still hidden. It is necessary to manage inflation expectations from a policy perspective, prevent imported inflation, and avoid inflation expectations becoming reality.
Global inflation expectations continue to ferment
Judging from the data released by various countries, global inflation is still at a low level. The United States' CPI rose by 0.6% month-on-month in March 2021, while China was only 0.4%, and most other major countries were around 1%. Judging from the data, it seems that the world is in a deflation situation.
However, given the rapid rise in global raw materials, food and other prices, many research institutions and economists are still concerned about inflation, and global inflation expectations have increased significantly. Former U.S. Treasury Secretary Summers pointed out that the super-large stimulus policy in the United States will trigger "inflation pressure that has never been seen in a generation." In the article "Morgan Stanley Warns Inflation Is Now "Entering The Overshoot"" Chetan Ahya, chief economist and global economics at Morgan Stanley, pointed out that strong stimulus policies will bring up demand and drive economic growth rates, which will push up wages and thus higher inflation. Under the influence of various factors, the inflation level will gradually increase, reaching an acceleration mode in the second quarter of 2022, and its inflation level will exceed 2.5%. Michael Pearce, a senior economist at Capital Economics, believes that signs of inflation are already very obvious and producer prices are driving consumer prices. Bill Dudley, former president of the New York Federal Reserve Bank, published an op-ed for Bloomberg entitled "Five Reasons for Fighting for Inflation in the U.S.", saying we should be prepared for the upcoming inflation. Especially after vaccination, service spending will rebound faster, which will drive up prices in the United States. Economists estimate that the leisure and hospitality industry, including hotels, hotels and airlines, will regain pricing power as demand recovers. It may even be necessary to raise prices significantly to balance demand with available supply. Stephen Jen of hedge fund and consulting firm Eurizon SLJ Capital believes that these will drive up inflation levels. Jim Bianco, president of Bianco, Wall Street, believes: "Once global central banks start to expel money, a series of economic activity may break out, which will be the first high inflation experienced by the new generation. This is the biggest concern in 2021." He expects the core inflation rate to reach 2.5% in 2021.
Some economists believe that the epidemic has changed the consumer spending structure, and consumers' spending on services has declined (in the United States, the service industry accounts for about 60% of the overall consumer price index and 75% of the core indicators), while consumption of food and other food has increased. Therefore, the 2020 CPI statistics cannot truly reflect the rise in prices. Cavallo Alberto used credit and debit card transaction data to construct CPI weights that are more suitable for the consumption structure under the epidemic and proposed the concept of "new crown inflation". He found that the US CPI underestimated the new crown inflation rate. Among the 19 major countries he studied, 12 countries have significantly higher COVID-19 inflation rates than the official CPI data. Marshall Reinsdorf also believes that the main reasons for CPI distortion during the epidemic are the low weight of food prices and the high weight of transportation prices.However, he also believes that as the epidemic subsides, CPI calculations in 2021 will be more complicated.
corresponds to economists’ concerns, and financial markets are responding to global inflation expectations. A survey of investment managers of Bank of America conducted in February 2021 showed that 37% of respondents said that inflation is the biggest risk currently facing, accounting for the highest proportion, exceeding the proportion of investment managers paying attention to the epidemic. In April 2021, the inflation expectations implicitly contained in the US 5-year TIPS (inflation-protected bond) have exceeded 2.5%.
In some countries, inflation is even reflected in macro data. In the Philippines, inflation rose from 3.5% in December 2020 to 4.2% in January 2021, a two-year high, surpassing the target cap of 2% to 4% set by BSP (Bangko Sentral ng Pilipinas, the Central Bank of the Philippines).
However, a considerable number of economists believe that the risk of inflation is not high. According to the Fed's September 2020 economic forecast summary, inflation will not return to the Fed's 2% target until 2023. The Fed's Bruno Braizinha said the Fed's focus is on "the deflationary aspect of the current shock." Forecasters surveyed by Bloomberg generally expect inflation to temporarily rise above 2% in the second quarter of 2021 before falling back to or slightly below that level.
At the same time, some economists pointed out that given that the global epidemic control is better than expected, with the popularity of vaccines, the global supply side will recover rapidly, and the price increase caused by short-term supply factors caused by the impact of the epidemic will no longer exist, and the supply and demand gap will further narrow, which will reduce inflation expectations and drive prices back. Read Pickert and Vince Golle of Bloomberg believe that due to high unemployment and sufficient labor supply will drive rapid growth in output, thereby weakening the foundation of inflation. The recovery in demand for services may be offset by weakness in certain commodities such as rent and used cars. Michael Feroli, chief economist at JPMorgan Chase, believes that high unemployment will curb wage increases and prices have a lack of motivation for demand.
The hidden dangers of inflation still exist
According to the analysis of domestic and foreign researchers and research institutions, most economists are worried about the potential risks of inflation. We believe that the hidden concerns of inflation remain in the context of soaring prices of important means of production, maintaining high prices of food, and global currency release.
The prices of important means of production remain rising
Judging from the price trend in the past year, the sharp rise in commodity prices has pushed the prices of means of production to remain high. Crude oil prices have been hovering at a high of US$60 per barrel recently, and have seen a leap forward from the ultra-low price in 2020 and the unprecedented negative price of crude oil futures (-37.6 USD/barrel), which has driven the continuous rise in my country's refined oil prices and also promoted the rise in US gasoline prices. According to data released by the BEA, in March 2021, the price of gasoline in the United States rose by 9.1% month-on-month, accounting for about half of the total CPI increase; it rose by 22.5% year-on-year, driving energy prices to rise by 13.2%. Basic materials such as
steel have also continued to rise. On April 30, 2021, the highest price of the main contract for rebar exceeded 5,400 yuan/ton, a record high, with an increase of more than 13% since March. In the Yangtze River Delta and other regions, the increase in some steel varieties after the year has exceeded 1,000 yuan/ton. From an international perspective, driven by demand, the United States has risen by more than 160% compared with August 2020, 68% more than the global average. Base metal prices have also seen rapid rises. In April 2021, copper prices (copper prices are very representative of economic growth conditions, basic metal price levels, etc., so they are also called "Dr. Copper") exceeded 70,000 yuan/ton, up more than 100% from the 2020 low. US stock market analysis website Seeking Alpha noted that the Material Price Index (MPI) has soared 40% since mid-November 2020, reaching its highest level since early 2014. The rapid rise in basic raw material prices may drive the rise of economic operating costs, thereby generating cost-driven inflation.
From a production perspective, some important raw materials producers, such as Brazil and Chile, have still had a serious epidemic, and the recovery speed of production capacity is lower than expected, and the supply gap of basic raw materials will be difficult to bridge in the short term. In addition, carbon emission reduction has become a basic requirement for the production of means of production, and it will inevitably increase the production cost of means of production in the short term. These supply factors will cause the price of basic commodities to remain high for a long time, and the price of basic commodities will rise, which may be transmitted to the final product price field, thereby pushing up the final product price.
From the perspective of demand, major institutions around the world are currently optimistic about global economic growth in 2021. The Global Economic Outlook released by the International Monetary Fund in March 2021 expects the global economy to grow by 6% in 2021, up 0.6 percentage points from January's forecast data. The strong growth brought about by the economic recovery from the epidemic will drive a new round of global inventory cycle changes, and this economic recovery is globally synchronized. Once the recovery of production capacity in a certain link is blocked, it will lead to an imbalance in supply and demand in this field, which will trigger price increases. The price increase caused by the recent tight chip supply is an obvious example. At the same time, economic uptrend itself will expand demand for means of production and will provide support for the price of means of production to remain high.
Affected by commodity prices, the prices of means of production in my country have risen sharply. In March 2021, the price of means of production rose by 2% month-on-month and 5.8% year-on-year, driving PPI rose by 1.6% month-on-month and 4.4% year-on-year. Among the 40 industrial industries surveyed, 30 rose, with an increase of 75%, 6 fell, and 4 remained unchanged. Agricultural product producer prices rose by 15%. Typical important means of production, such as thermal coal, has begun to enter the upward channel after the price has temporarily stabilized, and is now close to 800 yuan/ton; from the perspective of future supply, there is little room for thermal coal to increase production, and it is extremely likely to operate at a high level. At the same time, cement prices continue to rise. After the Spring Festival, cement clinker in some areas has risen by 100 yuan, an increase of 30%. In other aspects, chips and other products were originally products with continuous decline in prices, but recently demand has increased due to insufficient production capacity, and their prices have also risen significantly. In terms of shipping prices, due to the serious insufficient container capacity, container freight rates have soared, and the dry goods index has also remained at a high level; the global producer price index will also remain high. US stock market analysis website Seeking Alpha believes that global producer prices will change from a 1% drop in 2020 to a positive growth of 4.5% in 2021. The prices of means of production and related services remain high and may be transmitted to other fields in 2021, thereby creating inflationary pressure.
Global food prices have risen rapidly, and there is a risk of transmission
In the past three months, my country's CPI has been hovering at a low level, and a very important reason is the sharp decline in food prices. Food prices remained on the decline in March, especially pork prices, which continued to fall in March based on a sharp drop in February (-14.9%). As normal production has resumed, the price of fresh vegetables has fallen by 14.5% from 2020, and the prices of beef, mutton, chicken, duck, aquatic products and fresh fruits have all turned from rising to falling, with a decrease of 0.2% to 1.7%. It is the impact of these factors that have caused food prices to fall by 0.7% year-on-year and 3.6% month-on-month. Food prices occupies a high weight in my country's CPI, and its sharp decline is an important reason for the CPI to remain low. But we should see that the sharp drop in my country's food prices in 2021 is related to the high prices of food prices, especially pork prices in the same period in 2020, and the possibility of continued decline is small. From an international perspective, the FAO meat price index in March was 98.9 points, up 2.2 points (2.3%) from February, maintaining an upward trend for six consecutive months, and only down 0.5% from March 2020. This also shows that the basis for the continued decline in meat prices represented by pork in my country is not solid.
The short-term decline in food prices in my country does not reflect the general trend of soaring food prices in global food prices. At present, global food prices are experiencing a new round of rises.Affected by the epidemic, international food production decreased by more than 20% in 2020, driving a rapid rise in food prices. As of March 2021, the Food and Agriculture Organization Food Price Index (FFPI) averaged 118.5 points, 2.4 points higher than February (2.1%), and has risen for 10 consecutive months and hit a new high since June 2014. Cereal prices rose by 25.9% from March 2020 to March 2021, with corn rising by 42%, the highest in eight years. Soybean prices hit a new high. In March 2021, the average Chicago soybean futures price rose by 2.29% month-on-month and 62.79% year-on-year. The average price of CBOT soybeans in March 2021 was US$14.14 per bushel, compared with US$8.69 per bushel in the same period in 2020. Brazil's National Commodity Supply Company (CONAB) stated in its seventh crop survey that the soybean supply in 2021 is not optimistic due to the impact of soybean planting area and climate. In addition, about 75% of the western United States have been in a "severe drought". In the past few months, many states have experienced the most severe drought period since 2000. These factors will have a significant negative impact on international crop production.
Judging from the terminal food prices in major international markets, the FAO vegetable oil price index in March 2021 was 159.2 points, an increase of 11.8 points (or 8%) from February, and the highest level since June 2011. my country's edible oil price increased by 6.9% year-on-year. The average price of tofu in the Indonesian market rose by 30%, the average price of sugar in the Russian market rose by 61%, and the average wholesale price of eggs in the Tokyo market has risen by about 50% compared with the beginning of 2021. In March 2021, the U.S. Food Price Index rose 0.1% month-on-month and 3.5% year-on-year. Meat, poultry, fish and eggs rose by 5.4%. Although
food accounts for a relatively low proportion in CPI, its prices are fundamental and conductive. The rise in food prices will inevitably put pressure on global inflation.
Global loose monetary policy has a certain impact on inflation
Global currency easing will also affect inflation expectations. Monetaryists since the mid-20th century (represented by Nobel Prize winner Friedman) believe that "inflation is always a monetary phenomenon no matter when and where." The central bank's printing of money will inevitably have an impact on consumer prices. However, after entering the 21st century, the relationship between currency issuance and terminal consumer prices seems to have changed. Many countries continue to print money, which has not led to a significant increase in consumer prices. One of the important reasons is that financial assets absorbed the additional currency issued by the central bank. However, it cannot be ignored that the huge currency release will inevitably affect the price expectations of basic commodities, which will bring about expectations-driven inflation.
Since March 2020, the United States has introduced a total of about $6 trillion in fiscal relief measures (including the $1.9 trillion economic relief plan launched in March 2021), far exceeding the scale of economic relief during the 2008 financial crisis. According to the IMF's forecast, U.S. public debt will reach 135% of record GDP. Meanwhile, data provided by the IMF in the October 2020 World Economic Outlook shows that the Group of Seven (G7) public debt is expected to increase by about $4 trillion in 2021, which is far lower than the record $7 trillion in 2020, but is still at a high level. Overall, the G7 public debt level is expected to exceed US$57 trillion, equivalent to 140% of GDP. Observers pointed out that other central banks will also follow up on currency easing, and it is expected that the world's four major banks (the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England) will accelerate the printing of money on a large scale in 2021, with as much as US$3.4 trillion (about RMB 22 trillion) flowing into the market.
Economists have differences on whether central banks' easing monetary policies and governments' easing fiscal policies will lead to serious inflation problems. For example, Michael D. Bordo and Mickey D. Levy found through research on the relationship between historically loose fiscal policy and inflation that a considerable number of expansionary policies did not lead to inflation. This connection seems to have been cut off since the 2008 financial crisis. Therefore, the impact of the "double loose" policy on inflation during the COVID-19 epidemic needs to be further studied in combination with specific scenarios.One possible scenario is that large amounts of suppressed household savings and large amounts of Fed liquidity lead to strong economic growth and inflation. "The link between money supply and inflation remains fragile," said Derek Tang, an economist at LH Meyer, a Washington monetary policy analysis firm. "We may have a large amount of money supply. But that doesn't necessarily lead to high inflation." The reason is that the speed of currency circulation is falling rapidly and has now fallen to its all-time low. Therefore, many economists believe that government departments should adopt decision-making policies. Jim Glassman of JP Morgan Chase believes that government departments should choose to withdraw from loose fiscal and monetary policies when the economy resumes growth and the unemployment rate drops rapidly.
We believe that global means of production and food prices have risen, strong economic growth has driven the increase in demand, and the recovery of production capacity has a certain degree of dissynchronization. In addition, countries around the world have adopted loose monetary and fiscal policies simultaneously, which has left hidden concerns about global inflation in the short term. In addition, countries have emphasized increasing investment in ESG (Environment, Society, Government), and China promotes "carbon peak and carbon neutrality", which will have a certain impact on the production costs of enterprises and will also have a potential impact on long-term prices.
Policy suggestions for doing a good job in inflation expectations
The above analysis shows that we need to pay close attention to the potential inflation risks brought by pulsed high inflation abroad. Therefore, we should do a good job in expectation management from five aspects: precise and effective implementation of active fiscal policies, ensuring the safety of raw material supply, supporting stable and high yields in agriculture, promoting demand-side reforms, and accelerating the improvement of the supply chain, so as to resolve inflation risks invisibly.
implements positive fiscal policies. From the perspective of cost and benefit, the attractiveness of fiscal policies is increasing, and fiscal dominance will become a medium- and long-term trend. Against the backdrop of low global growth, low interest rates, and intensified gap between the rich and the poor, the marginal cost of fiscal financing is far lower than before, while the potential marginal benefits such as promoting total demand and reducing gap between the rich and the poor are higher than before. From the perspective of the United States, the Biden administration is actively promoting a fiscal stimulus of $1.9 trillion; Federal Reserve Chairman Yellen pointed out that the most appropriate approach at present is to "act big", and further measures are expected to be introduced in infrastructure investment, environmental protection and tax reform in the future. Against this background, policy makers have decreased their emphasis on fiscal policy's own balance, and their understanding of the sustainability of government debt is also changing. "The proportion of interest expenditure of government debt to GDP" replaces "the proportion of public debt to GDP" and becomes a measure of government debt sustainability. Therefore, under the background of global high inflation expectations, my country should implement a positive fiscal policy, pay more attention to fiscal policy serving economic structural adjustment and high-quality development, and effectively play the important role of fiscal policy in expanding domestic demand, scientific and technological innovation, ensuring people's livelihood, and rural revitalization. At the same time, the government and central banks can increase their tolerance for inflation in specific periods and avoid taking measures to curb inflation too early and too rush. For example, the Federal Reserve introduced the "Average Inflation Target System" in September 2020, saying that it will allow inflation levels to moderately exceed 2% within a certain period of time.
Strengthen the management of raw materials supply chain. The current risk of inflation is mainly caused by the rise in international commodity prices to spread to consumer prices, thereby pushing up inflation. Therefore, we must make full use of existing mechanisms such as the "Belt and Road" to strengthen partnerships with countries that produce raw materials through in-depth cooperation with countries that produce raw materials, help these countries restore production capacity as soon as possible and ensure the safety of raw material supply. The government should also guide enterprises to extend supply contracts with these countries/regions, provide financial, financial, information and other aspects to improve the stability of the prices of means of production.
actively supports agriculture to stabilize and high yields. From the perspective of international trends, food prices are maintaining high levels, and my country's soybeans and other agricultural products have a high dependence on foreign countries and are easily affected by international markets.Therefore, it is necessary to further improve the reserve system of important foods, put more effort into stabilizing and expanding the production of key foods, expanding agricultural product production, and striving to stabilize agricultural product prices.
promotes demand-side reform and realizes a virtuous cycle of supply and demand in which demand drives supply and supply creates demand. should accelerate the cultivation of a new generation of consumption hotspots, vigorously promote support for various services that are insensitive to raw materials, including new culture, digital economy, new tourism formats, leisure and vacation, and health-related consumption. On the one hand, it should improve residents' sense of happiness, and on the other hand, it should avoid concentrating on consumer goods-intensive consumption, forming self-realization of inflation.
comprehensively promotes the resumption of production and accelerates the improvement of the industrial chain and supply chain. In view of the actual situation of the global supply chain industry chain suffering from the dual impact of politics and the epidemic, we should give full play to China's domestic market advantages and the advantages of complete industrial system based on the characteristics of the supply chain industry chain, and establish a modern industrial chain and supply chain to avoid price increases due to the abnormal recovery of various links of the industrial chain and supply chain, thereby bringing price impacts to downstream final products.
Author's unit: Institute of Finance and Economics Strategy, Chinese Academy of Social Sciences
