By Charles Henry Monchau, CIO at SYZ Group
The rise in inflation this year combines aspects of both demand and supply shocks. With regards to the latter, some signs of improvement have been observed recently.
Inflation is certainly one of the most searched terms in Google during 2021. So many articles have been written on this topic this year, whereas it was thought a few quarters ago that this word had indeed disappeared from the economic glossary.
As it has been documented many times, the surge of inflation on both sides of the Atlantic stem from both a demand shock (a much stronger recovery than expected) and a supply shock. Regarding the latter, we have seen this year that COVID-19 has a major impact on the efficiency of supply chains around the world. Due to the pandemic, global supply chains have to deal with the emergence of a large number of bottlenecks that lead to shortages and delays in delivery – with upward pressure on prices.
These “supply bottlenecks” can be classified into four distinct categories: those which can be observed at the production chain level (automotive manufacturers, semiconductors, etc.), constraints linked to transport and logistics, labor shortages and finally, supply/demand imbalance of energy resources (oil, natural gas, etc.).
But while inflation numbers hit record levels in recent weeks, there are some encouraging developments at the supply level.
Concerning the first category, automotive and industrial companies recently published some reassuring messages concerning their production level in the 4th quarter. For example, Toyota has just announced its production targets for December, which appear to be significantly higher than in previous months, thanks in part to a better supply of semiconductors. A trend which has also been confirmed by the American giant General Motors.
On the transportation and logistics side, the Baltic Dry Index – which is the cost of shipping goods for export by sea – had literally surged since late last year. But over the past 5 months, it has fallen sharply (see graph below). Add to this a political will to make the transport of goods more fluid; in the United States, the White House has expressed its wish to have delivery companies FedEx and UPS running 24 hours a day, 7 days a week. Same requirement for the very congested Port of Los Angeles.
Chart: The Baltic Dry Index trades at a 5-months low (source: Bloomberg)