The Economist - UK (2022-03-19)

The Economist March 19th 2022 Finance&economics 67

existencewiththevirus.ChinaMeheco,a stateownedfirm,signeda dealtosupply Pfizer’sPaxlovidpill,whichhelpsprotect infectedpeople against serious disease. Butthelatestoutbreakhasbeenmetwith morehawkishrhetoric.Ona visittoJilin onMarch13th SunChunlan, oneofthe country’s four deputy prime ministers, saidChina’sprovincesshouldfollowtheir zerocovidstrategywithoutcompromise. Thatrelentlessnessmay,however,re quirecompromiseonothergoals.Morgan Stanley,a bank,hascutitsforecastforChi na’seconomicgrowththisyearfrom5.3% to5.1%.It thinksgdpmaynotgrowatallin thefirstquarter,comparedwiththeprevi ousthreemonths.Theeconomymayyet reboundlaterintheyear.ButifChinaisto comeclosetoitsgrowthtarget,itwillfirst havetoclamberoutofitsditch.n

Consumerprices

A Russian

phenomenon

L

ast summer, amid mounting alarm about inflation in America, economic advisers in the White House penned a blog post in which they examined historical parallels. Although the press was full of comparisons with oil shocks in the 1970s, they wrote that a nearer relative was the dislocation after the second world war, when supply shortages interacted with pentup demand. It was a wellreasoned argument. But the surge in commodity prices over the past month, in the wake of Russia’s invasion of Ukraine, gives rise to an unsettling question: is the global econ omy now seeing a 1970sstyle price shock on top of a late1940sstyle supply crunch? To be sure, no serious economist ex pects inflation in the rich world to reach the giddy doubledigit heights of those epi sodes. On March 16th the Federal Reserve raised interest rates for the first time since 2018, kicking off a tightening cycle that it expects to continue well into next year. Moreover, the retreat in oil markets in re cent days could offer relief. Nevertheless, surging prices for every thing from wheat to nickel threaten to add to inflation. And rolling lockdowns in parts of Chinacould exacerbate strains on global supply chains. Consumerprice in flation in America already stood at a 40 year high in February, at 7.9% year on year; the rate in the euro area, meanwhile, ex ceeded 5%. Investors are still far from persuaded that central bankers are on top of the pro

blem.Themoststrikingevidenceisthein flationexpectationsthatcanbefoundin fixedincomemarketsinAmerica.ice, a fi nancialfirm,distilsa fewdifferentnum bers,includingyieldsoninflationprotect ed bonds and interestrate swaps, into shorttermandlongtermindicesforgaug ingexpectations.InlateJanuarytheex pectedrateofinflationoverthenextyear was3.5%.OnMarch15thitstoodat5.4%. Expectationsintheeuroareahaveseen similar,if slightlysteeper,trends.Theone yearinflationswap rateroseto5.9%on March8th(seechart). Marketsareinherentlyvolatile,sode riving inflation predictions from bond yieldsshouldbetakenwitha pinchofsalt. Buttheshiftinpricesisbroadlyinline withwhateconomistsareforecasting.Last weekBankofAmericaraiseditsinflation forecastsformuchoftheworld.InAmeri caitnowexpectsinflationover 2022 asa wholetoaverage7%,upfromitspriorfore castof6.3%.Intheeurozoneitseesan evenbiggerincrease,withinflationaverag ing6%thisyear,wellaboveitsprevious forecastof4.4%.Thechallengeisgreater forEuropebecauseofitshighdependency onRussia,whichsuppliesabout45%ofits gasimports. Inanindicationofjusthowpervasive thepressuresarelikelytobe,economists areevenratchetinguptheirinflationfore castsforJapan,wheredeflationhaslong beenthebiggerthreat.OnMarch8ths&p, a ratingagency,saidthatJapaneseinflation would average2% this year, more than doubleitspreviousprediction.Sofarfore castersexpecta relativelymodestincrease inoverallinflationinemergingmarkets. Butrisingfoodcostswillbeespeciallyda magingfortheirpoorestcitizens. Two related questions emerge from theseforecasts.Thefirstiswhethertherise in commodity prices today will feed throughintoloftyinflationinthelonger run.Thereis,infact,reasonforcautious optimism.Alargebodyofresearchshows thatthepassthroughfromhigheroilpric esintononenergyinflationisquitelimit

ed.Forinstance,GoldmanSachs,a bank, calculatesthata 10%increaseincrudeoil prices leads to a jump ofnearly three tenthsofa percentagepointinheadlinein flationinAmerica,buttoanincreaseof justaboutthreehundredthsofa percent agepointincoreinflation(strippingout foodandenergyprices).Thathelpsexplain whymarketexpectationsoflongerterm pricetrendsremainmoresubdued:pricing forinflationfiveyearsfromnowiscloseto theFed’sgoalofkeepinginflationtoanav erageof2%. Thefollowupiswhatcentralbankers choosetodoaboutrisingcommoditypric es.Thereceivedwisdomofthepastfewde cadesisthatpolicymakersshouldavoid overtighteninginthefaceofoilshocks. Indeed,surgingenergypricescanactasa dragonconsumption,whichisa particular concernforEurope. Butwithrealinterestratesdeeplynega tiveinbothAmericaandEurope,central banksstillhavea longwaytogotoreinin inflation,whateverhappenstocommodity prices.OnMarch10ththeEuropeanCen tralBanksurprisedmarketsbyannounc ingthatitwouldwinddownitsbondbuy ingmore quickly. And accordingto the Fed’sprojections,itsquarterpointratein creaseislikelytobethefirstofseventhis year. Centralbanksare,fornow,stickingto theirprewarplans.n

WASHINGTON, DC The inflationary consequences of war will spread

Shock and war Inflation expectations, one-year swap rate 2022, %

Source:Bloomberg *Retail price inflation

10

8

6

4

2

0 February March

Japan

Britain*

UnitedStates

Euroarea

Russia invades Ukraine

Thecommoditiescrunch

When China met

the free market

T

he tradingof commodities is an ar cane activity that makes it into the pub lic eye only at times of extreme hubris. That is when names like the Hunt brothers, who tried to corner the silver market in 1980, and Hamanaka Yasuo, or “Mr Cop per”, who in 1996 produced huge losses for Sumitomo, a Japanese trading house, be came household ones. Xiang Guangda, a Chinese tycoon known as “Big Shot”, vault ed into the news this month by taking a po sition on nickel that went badly wrong. The result has been one of the biggest tremors in the 145year history of the Lon don Metal Exchange (lme). It has also brought China, which is keen to exert more power over the trading of commodities, face to face with free markets gone mad. In the cloistered world of the lme, some facts about the aﬀair are clear. One is that nickel prices, already hot before Russia’s invasion of Ukraine, surged after the West imposed sanctions on Russia. Another is

A nickel-trading fiasco leaves three big unanswered questions

The Economist - UK (2022-03-19)

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