What’s Really Behind the Great 2021 Inflation Debate

the podcast that brings the global economy to you. If you're under forty five listening to this in America, Europe or Japan, it's a fair bet you've never given much thought to inflation. The price of some things like a college education, has gone up a lot in your lifetime, but by and large, the price of things we buy every day has been fairly stable, even gone down. In fact, it is deflation falling prices that's more often kept policymakers up at night, not the kind of double digit inflation

rates we saw in the nineteen seventies. But is that all about to change? Well that's the fear that started to rattle financial markets this week, especially after that unexpectedly high April inflation number came through in the US. That headline annual rate of four point two percent that you just heard about is the highest since two thousand and nine.

It's also been seized on by Joe Biden's political opponents, who put it together with recent disappointingly weak jobs growth and say his spending plans are going to bring on seventies style stag inflation. Doesn't help that drivers in parts of the US have been reminded of that era this week waiting in long lines for a tank of gas thanks to a cyber attack on a big fuel pipeline. Now we'll get the full story on that in a

minute from Bloomberg Energy supremo Javier Blasts. I'm also going to talk to a Wall Street economist with his own take on the great inflation debate. But first we go to Chief Asia Economy correspondent and occurrent in Hong Kong to find out where at least some of this inflation pressure has been coming from. US Exporters are crying foul as the price of shipping containers spikes are Semiconductors are the brains that power technology, and right now there is

a message shortage of those brains. This is now day four, one of the world's largest container ships, completely bringing traffic in the Suez Canal to a standstill. It's hard to imagine China's factories have spent months absorbing shocks from soaring prices for shipping containers under raw materials, a scramble for

semi conductors, and even the blockage of the Suez Canal. Now, manufacturers in the world's biggest trading nation are under pressure to pass on these charges to their overseas customers, potentially adding to global inflation pressu years Briant Chan is president of Windward Corporation Limited and among the manufacturers grappling with the price surge. I went to visit his officers in Hong Kong to hear what's happening. One has been very

challenging year and this time around. You know, we are seeing increases in pretty much everything that we we we purchase the plastic resin, We're seeing increases in electronic components, packaging, metal parts, so pretty much, you know, everything that it's needed to to you know, go into the manufacturing of a product. Manufacturers in China are well used to volatile price wings, but this time, they say the breath of cost increases is unusual, So I'm just going to use

sort of a random product. It's more like a consumer product. This is a camera that a hunter will will typically use to track the motions of animals in the wild, so you know, to help them when they go hunting. The electronics components make up about the cameras costs and have risen roughly ten Other components, such as the packaging, make up over tenth of total costs, and those have

also risen about ten percent in price. So when we factor in all the different categories of material and the respective increases, this comes in out of US increasing costs for US. The big unknown is how long these higher costs will last. The optimistic view is that the supply chain blockages caused by COVID nineteen disruption might just smooth out. Manufacturers say they're looking for workarounds and cost savings to

limit the need to pass on costs. Christopher Say is chief executive officer of Musical Electronics Limited, which makes products such as Bluetooth speakers and high powered home stereos for the US market. We have two ways to do it. First of all, you used to do the re engineering trying to save some courses from the re engineering. And the second is how to do it in a better way. That means how it can be more efficiency in production, so that may save some money. But he also says

the pressures are real. He cites, for example, a shortage of integrated circuits, which are crucial components for electronics. It can be raised up from a year ago, let's say ten dara to twenty dollars to even fairly or folly dollars, so the difference could be very big and healed. Not only that, also the delivery the time is much longer

than what we are expecting. Uh, it's very difficult. We have to inform the customer that for the current business that we have taken the orders, we have no choice. Will uh just manufacturing according to the price that we have come, that we have a creed. But a year later, on nine months later, a sthority that we have to increase our past all our increase the courses to our customers.

Chang Chu, Bloomberg Economics Chief Asia Economists, says the soaring producer price index in China is only one part of a global jigsaw. My sense is at this point China's PPR development is part of the global story rather than being the single factor driving it, and that several things going on for the global producer prices um Clearly there's a search in demand. Economies are coming back, they are

opening up, the global manufacturing sector is booming. I also spoke to Ding Chuang, he's chief economist for Greater China and North Asia at Standard Chartered. His research shows a correlation between China's producer prices and the US consumer inflation, so we may see PPR inflation at seven percent handle

around in the middle of the year. We cannot conclude for sure that China's PPI increase causes higher CPI inflation in the US and the rest of the rest of the world, but there is anecdotal evidence that the Chinese exporters have gained pricing power recently. And he says where China goes, the world follows because the fact that China recovered faster than the rest of the world inflation indicating in China may have a leading role in predicting inflation

in the rest of the world. However it plays out, the last few months have been pretty volatile for China's manufacturers and few expect a circuit breaker anytime soon. When woods chance, he's higher prices as inevitable. But in the situation where increases are across a range of different categories and at a very steep rate, it's certainly not something

that a manufacturer is able to bear. You know a well, talking of supply bottlenecks and the potential for inflation, you might remember I spoke to Bloomberg's chief energy correspondent, Heavier Blasts, earlier in the year when that big ship got stuck in the Panama Canal. We talked then about the key bits of US infrastructure which could really hurt if they

got interrupted. Somewhat unnervingly, one of them, the country's biggest petroleum pipeline, has just been hit by a massive cyber attack, raising fears that gas stations all over the US could start to run dry. Have you just tell us quickly? I guess you know what happened and why is this pipeline so important? The Colonial Pipeline is the most important

oil products by a line in the United States. It transports gasoline, diesel, and get fuel from the US Gulf of Mexico Coast, where most of the refiners in the US are located into the cities and big suburbs of the East cause of the United States. So everything from think about Atlanta all the way up to New York and and be John and and it transport about two

point five million barrels a day of refined products. Used to put that in context, that's more than the old the oil demand of Germany, just in one single pipeline. And what happened is that the pipeline company called Colonial got hacked on a cyber attack on Friday, and since then the pipeline has been shut down and UM refined products are beginning to run quite shortly in the United States.

So that means that that means gas stations, petrol stations up and down the country actually finding they're running out of petrol. Yes, and and there are two concerns here. One is that obviously those gasoline UM those fuel stations are not getting the supply as regularly as they used to uh, and they're draining down their stocks. But all so, because many citizens are hearing the news about the hack, the first thing that they're they're they're doing is well,

I should just put more gasoline on my car. They're going into the gas stations, and there's a bit of panic buying and that is accelerating the demands. Who is making the things a bit worse? So when's it going to be fixed? While Colonial has said that they're hoping to restore substantially all services by the end of the week, but they're not telling much to their customers, the big oil companies, the big gas station companies and um and and the consign is that this maybe go a bit longer.

It's also not very clear whether Colonial really have a plan to restore everything. At the moment, they have been able to restore service on a very small portion of the pipeline, and they're doing it manually rather than using any technology and anything automatic. And then when people listening to this, it could be that it will have been it will have been resolved, but of course it's still

raise questions. Is about longer term how well prepared this pipeline other key bits of infrastructure are against this kind of attack. Yes, and and Colonial is not unique. I mean, it's a very large pipeline, but around the world there are similar key pieces of infrastructure that we take for granted to transport crude oil, refined products, sometimes natural gas, or the electricity in network agreed, and the fact that Colonial was suffered this cyber attack and it was in

a way easy to shut down completely. The whole pipeline is really getting a lot of people in the oil industry and the wider energy industry very consigned because they think that it is possible that happened to Colonial, it may be possible in other pieces of key infrastructure. Do we think they've paid ransom? Is that going to be part of the solution. Well, certainly they have been attacked by a ransomware that they are being asked to pay.

It's on some money, um. And interestingly, the United States government is saying publicly that they are not advising one way or the other to the company, which I suppose that it means that at some point perhaps Colonial will pay, so they're not. So it is interesting they're not saying what they would normally do when people, when people get taking hostage, that you that you mustn't given. Is this by far the biggest attack on this kind of critical

infrastructure that we've seen? Has there been Have there been other attacks in other countries. It's certainly the biggest attack of this kind that we have seen in the United States.

We have seen attacks to the electricity network and developing countries, and we saw a couple of very big and prominent attacks in Saudi Arabia against Saudia Arangko and another petrochemical company, but that they didn't affect production, but they really affected lots of computers in in in offices and and and more kind of the back and and and middle office

of those companies. So certainly the this is UH, this is an escalation, but this is not the first time that we have seen UH cyber criminals targetting the energy infrastructure. I guess finally, we're obviously thinking in this program about inflation, long term risk of or possibility that inflation is really coming back. Should we expect gas prices to rise as a result of this? You think there's gonna be any

lasting effect. We have seen already UM an increasing casual in prices, retail prices in the United States on average in the country heat on Tuesday at six and a half year high of almost three dollar per gallon, and we probably we're going to see sustain sustained prices for the next few days until the situation is resolved. Beyond that,

it's a bit of a question mark. But with with the U S economy opening up and more people hitting the roads, probably we're going to continue to see pressure on on gasual prices, and I will not be surprising we see three aspergallon um for most of the of the of the salmony in the US that that will be the highest prices that US drivers have phase since two thousand and fourteen, and in many other parts of the world, certainly in Europe, that would be such a bargain.

Have your blast, Thank you very much, as ever my pleasure.

Now on Stephanomics, we tend to talk often to academic economists and policy makers about the trends shaping the global economy, but of course anyone investing long term in businesses in the US and around the world also has to have a view on much of that, which is why I thought we'd check in with Jason Thomas, the head of global research at the Carlisle Group, the US based investment company, and Jason, we're going to talk about the very long term.

But what's your what's your response to the this week's inflation news was it? Was it as dramatic as all that? Well, I think this is something that that we anticipated there there's two effects at work. Number one, base effects, when when you look at April one, you're measured relative to a lockdown economy twelve months ago, So so you over your inflation is going to be higher as a consequence

of that. Secondly, there is genuine inflationary pressure, and it's related to shortages and under production of durable goods in relative to demand for for many of those products, and so this is ongoing. I think that the shortages persist, the price pressures persist, and I think that we're going to see in months ahead inflation somewhat above the FEDS

two percent target. But if there's if there's a relative shortage of things that people want to buy, shouldn't we worry about that getting a lot worse when the economy starts to reopens. No, you know it really interestingly, reopening it is not the problem. In fact, it's the solution. So I think the more that one studies the origin of this inflationary pressure, the more comfortable here she is

that it's ultimately transitory in nature. And the reason I say that is when we look back at you had a very big decline in the production of durable goods and manufacturing and essentially manufacturers they locked down initially for for public health reasons, of course, but we're very slow to scale back production because many of them feared that the pandemic was going to be essentially a replay of the global financial crisis, where there was a sudden stop

of economic activity, huge plunge in sales of durable goods. But interestingly, as it turned out, it was almost the exact opposite, because after that initial decline in demand in March April into May, we found that households actually because they they're spending on travel, tourism, live of events, was so depressed and in fact so pressed by by social distancing and public health regulations that they actually that that

savings really financed the boom endurable goods. So you had a new and used car sales that were up seventeen percent. You have things like motorcycle sales up thirty eight percent relative to the pandemic. We had hot tub sales up by a comparable magnitude, appliances, furniture, So so it's really this interaction where you had a big decline in the

output and capacity. Because business managers manufacturers are really risk averse concerned about the outlook at the same time that that you had a boom in the household sector, so reopening. What that means is that household spending is going to normalize. So you're you're very likely to see on declines in purchases of things like hot tubs or or home renovations or motorcycle sales. There's more money goes towards theater tickets, airfares,

hotel stays, etcetera. So so I think that you're going to have a moderation and spending at the same time that capacity and output rises back to two pre pandemic levels, and by the fall of this year, perhaps into the winter, you'll have a moderation and some of these price trends. E certainly sympathize with that as someone who spent much more on on tents and outdoor fire pits in the

last few months than I might have anticipated spending. One thing that clearly has some of President Biden's opponents quite fired up is the idea that you know, you've got this potential for for inflation and then several trillion dollars of additional spending coming down the track. Kind of fiscal spending that we've not seen in a long time. Um, is is that something that we should worry about as

something that will give us inflation? Well, I think that what's been passed so far, uh, there was one point nine trillion dollar stimulus, uh, and that the the estimates suggests that about one point one trillion of that, about five almost five and a half percent of g d p H is going to be injected into the economy in this year one. But really the bulk of it

has already come and gone. In that it was the stimulus payments that hit bank accounts starting in March fourteen into into April with some of the physical checks and then the ongoing unemployment insurance benefits. But but that's not something that I expect to be sustained, you know. I think it's a it's a one time that the money arrives, it's it's spent. So so I'm not not terribly worried

there now. If there's ongoing spending, If if we have additional programs that are that are enacted where whether the spending you know, can can reach very high levels at some point, there is there's reason to suspect that that we could have sustained aggregate demand at outstrips that have

the ability to supply to to adjust. But but we're certainly not close to mean there yet, and I suspect that that most of the spending that's contemplated going forward is going to be very unlike in that it's going to be phased over a tenure window so as to

make that risk less likely. We have been mainly talking about the next year or two, but when you think about the next sort of five, ten, twenty years, are you thinking that this is going to going to continue to be like the last ten or twenty years, and that inflation has just not really been the issue that

we've been mainly worried more about. If anything, deflation, falling prices, and rising prices are used when you look ahead, do you think that the future is gonna look fairly like that or do you think there is potentially a more long term change underway. You know that I would say the biggest change, or one of the biggest changes in global macroeconomics over the past twenty years, has been the

way that we interpret the Japanese situation. Twenty years ago, Japan was viewed as sui generous, that this was a specific context and it was very specific to two Japanese institutions, cultures, some of some of the frictions that exist, the fact that they had, the fact they had falling prices. It was like a Japan and an inability the central bank

to stimulate demand. Uh, it just seemed that they were they had this this conundrum that that seemed again to be very specific to Japan, that the effect of a negative demand shock would would be too following wages in the way that that created a very specific psychology that

that is ultimately disinflationary and in fact deflationary. But today I think that lobal macroeconomics is now open to the possibility and in fact many people believe that that rather than specific to Japan, Japan was really just the vanguard, the first economy to experience what other advanced economies are are now getting a taste of in differing degrees, certainly the Eurozone far more than than the United States thus far. You also have technology, and technology has a very profound

disinflationary effect in two ways. First, the data transmission, data storage, communications technology prices really declined very steadily each year, and as that accounts for a larger share of the capital inputs. You essentially have a situation where a hundred dollars of current cash flow buys you a hundred and twelve dollars of capital equipment. So so that increases businesses cash flow and and also business savings while also having the disinflationary

on the price of their goods and services. Secondly, technology is allowed for the emergence of digital platforms. Businesses that are in many ways infinitely scalable. That is to say that they can increase revenues with little to know in incremental investment, little to know incremental hiring, and and those sorts of businesses really are now the largest businesses in the US economy by market capitalization, and they're quite different today.

They generate cash from operations that make cases is for to six times the amount of money that they reinvest in the business after accounting for for R and B

and other current expenditures. That that's quite different than the largest from the largest businesses in our economy UH forty years ago, which are largely industrial conglomerates that when they reached pathy, they had to go to financial moral UH to get the the money necessary to build new plants by new equipment scale up capacity, when when they reach capacity, they had to raise wages so as to bid labor

away from competitors or actually businesses and other industries. These are profound structural changes to the economy that I think are overwhelmingly disinflationary, and I don't see any reason to

suspect that that they're going to reverse anytime soon. It's interesting that you say that, and elviously, it chimes with some of the discussion we had in UM last week's podcast, because we were looking at this sort of changing global corporate landscape and what the the biggest fifty companies in the world now relative to UH and how much less capital intensive they were, and many of the things that

you've just been been saying. There are those though, who would point to some of those trends, but also the very the disinflationary impact that China, for example, has had over the last twenty or thirty years and say, actually, those things are going into reverse. We've heard about it in Asia on this program, but you know, not just short term, but wages going up in some of these low cost production company countries, UM labor shortages appearing in the US, but also at at a global level, just

to push back a bit. You know, you underestimating that. I mean, yes, all the things that you said have been true, but are they going to be a bit less true in the future. China was a major contributor to the disinflation and advanced economies over the past twenty

five years. That that is undeniable. But but I think it's that it doesn't necessarily imply that rising wages in China or the demographic issues in China will necessarily lead to higher in prices or higher structural inflation going forward.

And I think that that's the key fallacy among many who are propounding this argument, which is to say that they as as Chinese wages rise, as the demographic shortfall starts to create a shortage of workers in China, the the advanced economy trend, inflation rates are going to rise

as a result as there's worker shortage. The reason I think that this is not true is because when you look at the trade offs among manufacturers today, it's very often labor intensive manufacturing processes in emerging market economies where the wage rates are relatively low relative to automate, automation intensive, robotic intensive manufacturing processes and advanced economies and you see that when you look at robot intensity robots per capita,

very often it is in those high wage economies that are having demographic shortfalls. Of course, East Asia, UH, Japan, Korea at Germany also with with higher higher robots per capita. So you know, going forward, I think that this demographic shortfall is and this shortage of workers is going to to really increase the capital intensity of some of these manufacturing processes, and rather than upward pressure on on inflation, it's actually just going to accelerate some of these trends

that that were witnessing. I guess the final question would be what all this means for wages? I mean, the other for many you know that the positive side of inflation fears is wage hopes that they might finally get a pay rise. So what's the what's the implication of

what you're saying for wages in the USA? What I think longer term, the FED is trying to do is to not choke off recoveries and expansions just as real wages are finally growing and and so you know, when when the FED took a look back on the last ten years, they decided that policy wasn't too accommodative. As many analysts feared policy he was actually too tight, and they looked at the current framework and implemented over the last decade, there would have been far fewer rate hikes.

Maybe really in that nineteen period there would have probably been one third as many rate hikes as they actually implemented. So if the FED takes this more patient accommodative approach, that as the the payroll employment reaches and then exceeds pre pandemic levels, that will actually start to see some

sustained wage gains. But in general, I do think that more macro models and more macro economists are really trying to take account labor heterogen eighty and realizing that aggregates or averages as it relates to wages are really not

telling the story. And I think that that's also why the FED has become much more focused on equitable and inclusive growth, because we don't want you very high returns on human capital or skilled labor to in any way um disguise what it could be languishing wages in other segments of the market. Well, that is a very important note to end on, and it certainly is that it is the lesson of a lot possibly of the last twenty or thirty years, that the averages can look a

lot better than what's going on beneath the surface. Jason Thomas, thank you very much. Thank you for having me. Now, if you're interested in hearing exactly the opposite take on what's going to happen to inflation, you should flick back in your Stephanomics archives. I know you have them to November last year, my interview with Charles Goodheart and Manage Pradam. They literally wrote the book on the subject. Now that

is it for this episode of Stephanomics. I'll be back next week with a lot more from around the world. In the meantime, please rate the program. Thank you, and should you feel the need, you can always get more new us an analysis from Bloomberg Economics by following at Economics on Twitter. This episode was produced by Magnus Hendrickson, with special thanks to Jason Thomas and Brittany Berliner at

the Carlisle Group, Javier Blast and Ender Current. The head of bloombow podcast is Francesco Levy and this was Lucy meekins last week as the executive producer of Stephanomics, so thank you to her for all her hard work, and good luck, Lucy with your new job on Bloomberg. Di