May 31, 2022
BEIJING – “Inflation” has gradually become a buzzword in business and economic circles since 2021. In April, the year-on-year growth rates of the Consumer Price Index (CPI) and Producer Price Index (PPI) in the United States rose 8.3 percent and 11.0 percent, respectively. Right now the US CPI and PPI are still at four-decade high levels.
Europe is even worse in terms of inflation as European Union member states face energy shortages and geopolitical tensions triggered by the Russia-Ukraine conflict.
A combination of factors has contributed to the high inflation rates, including policy factors, supply issues and geopolitics, to name just a few.
After the outbreak of the COVID-19 pandemic in late 2019, many countries adopted expansionary monetary and fiscal policies. Take the US as an example. Government departments launched a series of stimulus policies, including both monetary and fiscal policies in response to COVID-19. In March 2020, the year-on-year growth rate of the broad money supply (M2) rose from 6.7 percent to 10.2 percent, reaching a peak of 26.9 percent in February 2021. In addition, the Federal Reserve Board has also stimulated the economy through reducing interest rates and practicing quantitative easing.
In terms of fiscal policy, the US government also introduced a series of stimulus programs. By early 2021, a number of fiscal stimulus policies were in place and paved the way for inflation. These programs involved a total amount of some $5 trillion, which was almost equal to a quarter of the US GDP in 2020. This is a striking stimulus program when we compare it to the Subprime Mortgage Crisis of 2007-2008. At that time, the Obama Administration’s fiscal stimulus policy stood at around $787 billion, which amounted to 5.4 percent of the US GDP in 2008. There is no doubt that US monetary and fiscal policies and the accompanying tremendous liquidity are very important causes of inflation in the US and the world as well.
Other developed countries have also adopted similar stimulus policies. The money supply grew at a peak rate of 12.4 percent in the eurozone in January 2021. Another factor that must be kept in mind is the Russia-Ukraine conflict, as it can lead to potential energy shortages, which further exacerbate inflation in the EU. As can be seen from statistics, the EU’s PPI was as high as 31.5 percent and 36.8 percent in March and April 2022. Even the CPI, which rose relatively slower, reached 7.4 percent in April.
Japan also adopted an extremely expansionary monetary policy. Even in April, when the US and other countries began to raise their interest rates, the Bank of Japan still stuck to an expansionary monetary policy. To achieve an expansionary effect, the BOJ continues to buy government bonds in order to suppress the interest rates of Japanese government bonds, thus injecting more liquidity into the market.
In short, the expansionary monetary policies of the world’s major developed countries are an important reason for the current global inflation.
The disruption of supply chains caused by COVID-19 is another important reason for global inflation. At the beginning of the COVID-19 pandemic, many countries around the world held a “wait and see” attitude, which led to even more serious spread of the contagion. The spread of the virus led to the cessation of production in some areas and subsequent serious shortages of supplies. That said, the labor shortages caused supply shocks. When demand recovers quickly but supply recovers more slowly, inflation occurs. COVID-19 has also led to chaos in transportation services, with rising freight prices and tight capacity, and this phenomenon has also pushed up global inflation.
The Russia-Ukraine conflict that broke out in February is exacerbating the problem of global inflation. The conflict directly leads to global energy jitters. NYMEX crude oil was $95.72 per barrel on Feb 28, just as the hostilities began. On March 7, the price rose to $130.50 per barrel, which is the highest level since August 2008. For US CPI data, the sub-item “Energy” (fuel, electricity and gasoline) prices rose by as much as 32.0 percent and 30.3 percent, year-on-year, in March and April. Another sub-item, “Transportation “increased 22.6 percent and 19.9 percent, respectively.
The Russia-Ukraine conflict has had an impact on minerals and agricultural products. Since the outbreak of the Russia-Ukraine conflict, prices of aluminum, nickel and copper have risen significantly. As an important food-producing region in the world, Ukraine’s agricultural production and exports have also been greatly affected. Global supplies of wheat, sunflower oil and other agricultural products have been seriously disrupted. Food prices are also an important part of the CPI, and the Russia-Ukraine conflict has undoubtedly contributed to the rise of global food prices.
In China, COVID-19 is increasingly coming under better control because of appropriate prevention policies. The industrial chain operates regularly, and the supply shock is relatively muted compared with other countries. In 2020 and 2021, the value of foreign direct investment (FDI) inflows to China was $163 billion and $173 billion, respectively. Foreign capital flowed into China to take advantage of its potential. These FDI statistics reflect the stable business environment in China and how foreign companies vote with their money and strategies.
As the world’s factory, Chinese plants need to import many raw materials, such as oil, copper, iron ore and so on. In fact, many Chinese manufacturing enterprises also face problems of rising costs. This can be seen in PPI and CPI figures. In other words, because PPI growth always represents “upstream” activity, so when the PPI growth rate is higher than the CPI growth rate, the “downstream” manufacturing enterprises will see weaker profits. This phenomenon is occurring in China.
The Chinese government also adopted expansionary monetary and fiscal policies in 2020. However, when compared with other countries, China’s policies were relatively mild. Actually, the growth rate of the M2 hit a peak of 11.1 percent in May and June 2020, and began to decrease gradually after that time. In comparison with the US and EU, China’s CPI and PPI are relatively low. In April, China’s CPI growth was 2.1 percent. Although the PPI’s growth rate was still high at 8.0 percent, this can be seen as the result of the growing price of global commodities to a greater extent.
On the whole, the Chinese government has been doing well in controlling inflation. China does not “export” inflation. In contrast, China is playing a positive role in reducing global inflation and stabilizing global prices.