Monetary bodies across the globe are keeping a watchful eye on inflation with an interest not apparent since three decades ago. Even Roger Bootle, the author of the book “The Death of Inflation,” had written last month: “Financial markets are going to have to get used to the return of troublesome issues that had, until recently, seemed long dead.”
He was talking about inflation, which to the lay – in an uncomplicated way, is simply synonymous to rising commodity prices. To a seasoned economist, however, it represents a host of issues that could upend and complicate economic recovery after a pandemic.
The US economy, being the world’s biggest, is experiencing some of the most worrying signs now: labor shortages and a consequential effect on wages, a tight housing supply situation and higher pricing, and more importantly, the rising imbalances in the sourcing of many crucial ingredients needed to restart.
The situation is expected to get exponentially worse with more countries – starting with the bigger, more developed ones – cranking up their economic engines as more of their populations acquire immunity from the virus through vaccination.
We had an inkling of how supply problems can affect the global economy last year when electronic chips used for many of our gadgets fell short, causing many of the big car companies to halt production lines because several electronic components could not be delivered.
Lopsided supply-demand relation
This time, a host of products whose inventories have been depleted during the last few months is now being hurriedly restocked, creating a lopsided surge in demand. Shipping bottlenecks have further upended the normal flow of commodities like sugar, lumber, copper, tin, and many others.
In addition, droughts, natural disasters, wars, hostile governments, stimulus funds, and even speculations of both the criminal and the wise, contributed to price pressures. We are in unfamiliar territory, where demand pressures have never been as challenging, and where everyone just wants to get back to normal after an abnormal year.
The big problem, however, may come with oil. Already, the international crude benchmark has breached the $70 per barrel mark, a 35 percent rise compared to yearend 2020. Oil inventories are falling, and replenishment is not easy as countries scramble for deliveries.
The greatest threat of a prolonged tight market situation is the recent accord among oil producing countries to continue a slow, tight reopening of oil taps at a time when demand is surging in big oil-import dependent countries like China and Australia.
Uncertainties in the economic recovery of India and Japan in the immediate future because of COVID-19 infections has greatly influenced OPEC Plus’ decision to add just two million barrels of crude a day in July in answer to growing global supply pressures.
OPEC is definitely back on the horse’s saddle, playing to its own projections that by August, global oil inventories will have dipped below the average levels from 2015 to 2019, thus leaving no doubt over its control on pricing.
Oil shock
Rightly, the Philippines’ central bank is more concerned about crude oil prices than any other basic commodity that is imported. With the help of an astute vaccination policy focusing on the working population, the country’s economy will likely get back to recovery faster.
Rising crude oil prices that can go much higher than pre-pandemic levels, though, are unnerving to the country’s inflation levels, which are now already at aggravated heights because of the pork shortages caused by the widespread culling in pig farms affected by the African swine flu.
The Bangko Sentral ng Pilipinas (BSP), on whose shoulder has fallen the task of keeping inflation within manageable levels, will have little power to control the effect of crude oil prices that could quickly go north over the slightest aberration.
Modern-day economics rule that inflation at two to four percent is not bad, but going up beyond that raises alarm. Tensions in geopolitics, coupled with a strong OPEC, bring back the specter of the early 1970s and 1980s when inflation even in developing economies rocketed to double digits.
Just as government economists treaded unfamiliar grounds then, so will today’s bureaucrats – who may have been too young to remember what happened four decades ago – need to find the right mix of solutions to meet the extraordinary demands of an extraordinary time.
Reader’s take on food security
We give way to a reader who delved on “outyards” for city dwellers as a way to augment food supply, thus blunting the effect of potentially runaway inflation. Here are excerpts from Raymond Tumao’s letter.
“City dwellers can start raising animals and vegetation for food in ‘outyards.’ An outyard is the opposite of a backyard, but both yards are owned by the same owner. This outyard is actually a modern farm that can be located within a distance of 100 km to and from the residence of the owner.
“Neighbors can join an outyard farm by investing in the first batch of ‘raw materials’ … and farm implements…. There is no need to go to the market anymore as all members are connected online and their daily food requirements are already programmed and delivered daily to the comfort of their homes.
“Animals raised in this outyard shall be for their own consumption, therefore there is no need to worry about the price of pork, fish and vegetables unless you want to buy something that the outyard does not produce.”
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Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at reydgamboa@yahoo.com. For a compilation of previous articles, visit www.BizlinksPhilippines.net.