ANALYSIS-From chips to ships, shortages are making inflation stick

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* Analysts still consider price pressure temporary

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* But lack of personnel monitoring the supply

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* US seen at greater risk from wage-induced inflation

LONDON, Sep 30 (Businesshala) – Rising gas prices, staff shortages, shipwrecks – global price pressures could mount faster than expected, challenging the outlook that inflation will prove fleeting.

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Central bankers, while adamant inflation will subside, are beginning to accept that it could remain higher for longer as a number of issues drive up the prices of goods and services and raise expectations of future inflation.

Their findings will ultimately determine how quickly policymakers open up to trillions of dollars of monetary stimulus to ease the COVID-19 crisis.

“Will central bankers focus more on growth and be “behind the curve”? Or will they be more concerned about inflation and quickly take the quintet away?,” said Charles Diebel, asset manager of certainty at Mediolanum International Funds. head of income.

Here are the five key elements in the inflation debate:

1/ gas flow

European and US gas prices have risen by more than 350% and more than 120%, respectively, this year. Oil is up about 50% and Goldman Sachs expects Brent crude to hit $90 a barrel by the end of 2021, up from around $80 currently.

Gas and electricity make up 4.8% of the euro area harmonized-inflation (HICP) basket used by the European Central Bank. Rabobank believes the price hike is a distinct ‘shock’ that could add 0.15 percentage points (ppt) to its 2.2% euro area inflation forecast for 2021 and 0.25 ppt to its 1.8% projection for 2022.

Many economists here to stay see higher gas prices as slowing US production, the rising cost of carbon emissions allowing for pollutants and restrictions on the use of dirty fuels.

In China, where factory inflation reached 9.5% in August, power cuts cut production of goods ranging from cement to aluminium.

Morgan Stanley said these outages pose a risk to end-users, such as those in auto supply chains, “with cost-push inflation and tightening of upstream supply that could impact downstream production and profits.”

2/chipflation

Semiconductors, or chips, as they are known, are small, but are having an outsized impact on global factories. At General Motors alone, chip shortages have been seen cutting Q3 vehicle deliveries by up to 200,000, while falling production has driven up prices for used cars.

Chip prices have gone up and semiconductor giant Taiwan’s TSMC is considering a further hike of up to 20%. It will cover everything from electronics to cars and phones to washing machines. But chip makers find themselves facing high costs ranging from commodities to electricity.

“It looks like these semiconductor shortages will persist over the next year,” said Jack Allen-Reynolds, senior European economist at Capital Economics.

or beyond. Intel’s CEO predicts that chips will comprise one-fifth of the cost of a car by 2030, up from 4% in 2019 if vehicles become self-driving or electric.

3/Food Inflation

An index compiled by the Food and Agriculture Organization of the United Nations shows that global food prices rose 30% year-on-year in August – a sign of increasing price pressure.

While higher agricultural commodity prices are behind the jump, analysts at JPMorgan also attribute food price inflation to pandemic-related pressures such as logistics disruption and transportation costs.

In emerging markets, where food inflation makes up a large portion of the basket, there is greater pressure to tighten monetary policy. This problem is not less for developed countries, but price rise is inevitable for commodities like soft drinks and snacks.

4/Greenflation

Stringent regulations to guide the transition to a greener future are blamed for promoting ‘greenflation’, for example, by shutting down polluting factories, vehicles, ships and mines, reducing the supply of key goods and services. Reduce.

European carbon emissions allowance prices have doubled this year to 65 euros per tonne. Morgan Stanley estimated in June that the price of 100 euros would increase European retail electricity prices by 12%, leading to a 35 bps increase in euro area inflation.

There are other examples. Falling ship orders due to upcoming rule changes on the fuel could be a tailwind for shipping rates that have already risen 280 percent this year.

NatWest attributes the commodity rally at least partly to the shift to green technologies that drive up mining and production costs.

All of this may not be fully factored into the calculation of inflation. For example, as markets see euro area inflation reach 2% after just a decade, Danske Bank “sees upside risks to inflation expectations … once the implementation of the green transition picks up”. .

5/salary

As prices rise, so do expectations of future inflation among consumers, who demand wage increases accordingly.

The picture of wage hikes is mixed. The survey shows that America’s median hourly earnings rose 0.6% in August and US five-year inflation expectations are running around 3%.

In some areas of the UK, income has increased by as much as 30% this year. Euro area labor costs fell in the second quarter but inflation expectations are rising alongside inflation.

“The markets may be a little extreme in their pricing, but I’m not advising investors to fade that move,” said Jorge Guarayo, senior rate strategist at Societe Generale.

“When we go into next year, it will be a big test.”

Reporting by Dhara Ranasinghe and Sujatha Rao; Additional reporting by Stefano Rebaudo; Editing by Kirsten Donovan

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