Global inflation has been on the rise over the last year and there are various factors behind this increase:
- Global supply chain problems – empty containers being located in the wrong ports as a result of COVID-19 and issues like a shortage of microchips impacting the supply of cars. Add to that the increase in oil prices and freight charges as many ports closed down. The Chinese port of Yantian (the world’s third busiest port behind Shanghai and Singapore) was closed for a period of time. This alludes to a huge backlog in freight which won’t be cleared until well into 2022. According to the Baltic Dry Index the cost of moving raw materials by sea has risen by 194% since December 2020.
- Boom for consumer goods in lockdown – in order to make life more bearable there was big increase in demand for cars, furniture, household appliances and other items. This boom in durable goods coincided with a constraint in supply
- Labour supply constraints – with the borders being closed countries found that the normal inflow of labour was not available. This was especially prevalent in the low income service sector and amongst primary industries – fruit pickers etc in New Zealand.
Central bankers have wondered why inflation has remained so low and if they can reach their targets – 1-3% RBNZ. However as America has discovered even with record low interest rates an expansionary fiscal policy (lower taxes and increased government spending) will have a desired effect on prices. The challenge is to ensure that prices don’t spiral out of control. The question now is whether the higher levels of inflation will remain when the supply chains return to normal and supply can keep up with demand. Or will we see higher inflation as the norm within the global economy.