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Global inflation first half

In the past 60 years, the world has experienced various types of inflation, such as demand-driven, cost-driven, and mixed-driven demand and cost. The formation of demand-driven inflation is mainly due to the central bank’s “release of water”, driving demand restoration and widening the gap between supply and demand. Cost-driven inflation is related to a significant increase in the cost of production or living. Mixed demand-cost inflation is a combination of both.

Demand-driven inflation is the most common. Take the United States, the locomotive of the global economy, as an example. Basically, the year-on-year upward trend of CPI in each round is driven by the expansion of the supply and demand gap, which is mainly driven by improved demand, and its core driving force comes from the Federal Reserve’s monetary easing. Based on historical data, from 1960 to the present, the US M2 has led the demand-side indicator manufacturing new orders year-on-year changes for most of the time period compared with the same period last year.

Most of the cost-driven inflation occurred during wars or natural disasters. Typical examples were the Iran-Iraq War in 1978 and the Kuwait War in 1990, both of which impacted the global crude oil supply, triggered a surge in oil prices and raised global inflation.

Demand cost mixed inflation has the lowest frequency but the highest inflation pressure. For example, from 1970 to 1980, the large-scale monetary “release” of the US and the outbreak of two oil crises pushed the US CPI to over 10% year-on-year.

From 1960 to the present, in developed economies, led by the United States, the upward trend of CPI has lasted for about 3-4 years on average, and the longest upward period has been close to 9 years.

Compared with developed economies, due to unstable exchange rates in emerging markets, domestic inflation is often affected by large changes in import prices and volatility is often amplified. In history, there have been many cases of hyperinflation due to sharp depreciation of domestic currencies.

After the outbreak, both the United States, Japan, the Eurozone, and the United Kingdom quickly eased monetary policy and substantially increased the scale of asset purchases. For example, the monetary authorities of the United States, the Eurozone, and Japan have expanded their asset scales by 1.9 times, 1.6 times, and 1.2 times, respectively. Driven by the currency’s “big water release”, M2 in the United States rose to 27% year-on-year, a record high; M2 in Japan, the Eurozone, and the United Kingdom also rose to historical highs of 9.6%, 12.3%, and 14.9% year-on-year. Similar to advanced economies, major emerging economies have quickly loosened their currencies after the outbreak.

In order to further support the economy, developed economies led by the United States implemented large-scale fiscal “distributions.” As of the end of April, the fiscal stimulus implemented by major developed economies after the epidemic has exceeded the level during the 2008 financial crisis.

Under the strong stimulus policy, demand stopped falling and rebounded, continued to repair, and led to the continuous expansion of the supply-demand gap. From April 2020 to February 2021, the year-on-year growth rate of new orders in the US manufacturing industry continued to rise from -23% to 2%. The continuous repair of demand has driven the US supply and demand gap from narrowing to widening, which rebounded from a low of -4% to 10%.

Driven by the widening supply and demand gap, the US CPI bottomed out in May 2020 year-on-year, and then continued to rebound. Similar to the United States, the inflation levels of other developed economies have also expanded rapidly following the gap between supply and demand. Among them, the EU’s April CPI rose to 1.7% year-on-year, surpassing that before the outbreak; Canada and the United Kingdom’s March CPI also reached 2.2% and 0.7% year-on-year respectively, which were significantly higher than the low point after the epidemic.

Different from the situation in the past after the economy came out of recession, due to the influence of fiscal “money” which reduced residents’ willingness to work, labor costs in developed economies such as the United States continued to rise.

It is also different from the previous stage of economic recovery. Due to the shortage of vaccines and the frequent rebound of the epidemic, the production capacity of agricultural products, copper, iron ore and other raw materials in emerging economies has continued to be limited, and prices have risen sharply. The epidemic and the “carbon neutral” policy have also affected the industrial production capacity of some economies, continuing to amplify the contradiction between supply and demand in the global industrial chain.

The rising cost of labor and raw materials, as well as the expansion of the contradiction between supply and demand in the global industrial chain, have just begun to push up inflation in advanced economies. Inflation in emerging economies (except China), in addition to being equally vulnerable to rising raw material prices and the enlargement of the contradiction between supply and demand in the global industrial chain, may also be “fueled” by the depreciation of the local currency exchange rate. It is necessary to be wary of emerging economies such as Turkey and Malaysia, which are under pressure to repay their foreign debts, facing the risk of hyperinflation due to the sharp depreciation of the local currency exchange rate.

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