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Reopening the world after a once-in-a-century pandemic sure is proving expensive.
The 0.8% jump in the US consumer price index in April propelled the most-watched barometer of inflation to a 4.2% annualized pace – the highest since September 2008.
US economy bulls are hard-pressed to downplay the trend given the preponderance of evidence, well, everywhere.
Airfares jumped 10% – the very same rate at which the cost of used cars and trucks increased (the most in the CPI’s 68-year history). In annualized terms, used cars and truck prices, a key inflation barometer, are skyrocketing at a 21% rate. Prices for lodging away from home rose 8%.
The real inflation scare
The real worry for Asia, though, is the up creep in “core” CPI, excluding volatile energy and food items prices. That data series rose 3% in April from a year ago – up 0.9% on a monthly basis. Both well exceeded estimated gains of 2.3% and 0.3%.
The ongoing surge in commodity prices suggests more to come – that producer price gains may feed into finished ones.
Energy costs, for example, were up 25% in April from a year earlier – a 49.6% jump for gasoline and 37.3% for fuel oil. That came even though most energy categories saw a decline in April. The costs of other vital commodities are surging, too.
Iron ore prices are close to doubling in only six months. Copper costs just past their 2011 peak, up 80% over the last year. Rebar, a steel reinforcer vital to construction, is up more than 50% in the last 180 days. The Bloomberg Commodity Spot Index, which includes the global prices of 23 raw materials, is now the highest in a decade, up 70% from March 2020.
Oddly, though, China seems barely to have noticed.
Beijing’s shock absorber
There’s plenty of upward pressure on factory-gate prices. China’s producer price index jumped 6.8% in April year-on-year, the fastest in three-and-a-half years.
Yet the mainland’s CPI rose only 0.9%. That has economist Grace Ng at JPMorgan concluding Chinese inflation pressures overall are “quite manageable.” After the global trauma of 2020, Ng says, there’s still a “lack of consumer pricing power” in Asia’s top economy.
Yet Ng’s forecast that China’s CPI will peak around 1.4% this year is more complicated than it seems. There’s been much chatter in economics circles about the “shock absorber” effect emanating from China. A case in point is manufacturers effectively eating surging raw materials prices – a 15.2% jump in April alone – and not passing them along to consumers.
China’s latest PPI registered a 5.4% jump in manufactured good costs. Purchasing managers indexes, meantime, point to China’s input costs far outpacing output prices. In a recent analysis, Bloomberg economist David Qu concludes that “the world’s factory floor is putting a damper on global inflation pressures, not contributing to the inflation scare.”
As analyst Hu Yanhong at Yingda Securities notes, Chinese companies boosting prices “could become an obstacle to economic advances.”
But for how long can this last?
The odds are low, and dropping, that the most important manufacturing nation will continue absorbing higher input costs. That could greatly complicate 2021 for both President Xi Jinping and People’s Bank of China Governor Yi Gang.
The chain of events to detail Beijing’s year could work like this: cost surges spread to mid-stream products, which in turn elevate costs of midstream and downstream merchandise, propelling living costs for 1.4 billion mainlanders.
In recent years, Xi’s economic team has encouraged and incentivized mainstream producers simply to tolerate overshoots in materials prices both to the upside and the downside. The political imperative is to avoid great volatility in prices – and not export China’s zigs and zags to the world – combined with competitive market structures to limit big shifts in costs.
“This time around,” says Bloomberg’s Qu, “the difference between changes in producers’ input and output prices, as well as relatively subdued consumer prices, suggest China is taking much of the sting out of the rise in material prices.”
The problem, though, is what’s coming.
There’s a clear correlation between prices of iron ore, copper, crude oil and other key global commodities and China’s PPI. This is a product of China being the most pivotal buyer of all commodities and its central role as both manufacturer and processer in global supply chains.
Despite China’s epic scale, it also can be a microcosm for pressure points in global production cycles.
Between January and April, Xi’s economy imported 382 million tons of iron ore. It also pulled in 180 million tons of crude oil and 7.9 million tons of copper. This speaks to the extent to which post-Covid Chinese demand is influencing global dynamics – but also how that demand boomerangs back China’s way as costs threaten the inflation outlook.
The costs of iron ore imported into China rose at least 72% in the first four months of the year. Yet prices of steel-related products leaving China rose just over 15%. Can steel mills continue to simply absorb close to 80% of global price increases?
Food items could be another dangerous hinge point. Data from the UN’s Food and Agriculture Organization reported a 30% jump in global food costs in April year-on-year. That same month, Beijing reported that food output costs increased less than 2%. The odds of this yawning divide persisting are small.
US inflation impact on China
Events in the US also could pose control problems for China. Any surge in US yields, or market speculation of the Federal Reserve hiking interest rates, will reverberate back China’s way.
For now, Fed Chairman Jerome Powell isn’t panicking. He appears to be betting that upward inflation surprises will prove short-lived, having more to do with Covid-era quirks in data collection and seasonal comparisons than overheating.
Yet as Kate Marino of Washington-based Axios points out, small US businesses are suddenly hiking prices at the fastest rate since the early 1980s, back when Fed Chairman Paul Volcker was aggressively tightening credit. The NFIB Small Business Optimism Index reports a net 36% jump in executives hiking prices in seasonally adjusted terms. That’s a 10-point jump from March.
Hints of labor scarcity – perhaps a result of millions fearing Covid risks – thicken the US plot.
“Small business owners are seeing a growth in sales but are stunted by not having enough workers,” says NFIB economist Bill Dunkelberg. “Finding qualified employees remains the biggest challenge for small businesses and is slowing economic growth.”
The commodity price surge, and the broadness of the increase, could be a game-changer as major economies reopen. In the US, the return of motorists to the roads is boosting energy costs.
The recent gas shortages in Southeastern US states, related to a cyberattack crippling a major pipeline, are transitory. A generalized surge in demand is a different story. The jump in metals prices as manufacturing returns, too, has more and more hedge funds betting on a commodity-price surge.
Along with surging demand from China, dry weather conditions in Europe, the US and Brazil are boosting the costs of corn, sugar and wheat. Raw materials bottlenecks are adding to prices of everything from diapers to toilet paper to new homes to infrastructure to electronics to cars.
Ford Motor Co, for example, recently flagged an estimated US$2.5 billion impact on profits as costs of aluminum, steel and precious metals race ahead.
All this has US Treasury Secretary Janet Yellen, who chaired the Fed before Powell, admitting that borrowing costs may have to increase so the biggest economy doesn’t “overheat.”
Like Powell, though, Yellen argues today’s inflation will prove transitory.
There’s a limit, of course, to what central banks can do. Former US President Donald Trump’s trade war – including exorbitant tariffs on Chinese goods – is backfiring. They elevated the costs of goods and commodities, adding to scarcity problems.
The shocks to global supply chains also have increased costs for microchips that go into autos – and exacerbated semiconductor shortages everywhere. So far, President Joe Biden has dashed hopes the US might take its thumb off global supply-chain dynamics, adding to the uncertainty factor.
Perhaps the biggest question mark is whether China will – or can – continue to play a shock-absorber role to tame global inflation.
Don’t bet on it.