Covid-19, January 24th, the Financial Times website published an editorial in January 21st, saying the port congestion caused by the new crown caused inflation concerns. Over the past eight weeks, the shortage of empty containers and congestion in ports have led to a tripling of the price of a container from China to the United States. Rising transport costs have raised concerns about so-called “cost driven inflation” in developed economies. Covid-19 is not clear how much the new crown epidemic has damaged the ability of the economy to produce goods and services. If more normal activities are restored after the vaccination, then the overall demand that continues to grow is likely to quickly exceed the reduced supply. Stagflation – with high unemployment and rising prices – will be a nightmare for central banks that have to make policies for debt ridden economies. Transportation cost is an economic index known for its instability. It takes years to build a container ship, so when demand is high, it’s not likely to put more ships into operation: that means prices are soaring. If the demand is very low, container ships are of no other use. Therefore, when the transportation capacity is surplus, the transportation price falls sharply. During the first round of blockade, empty containers in Europe and the United States were idle, but now ports are unable to handle the surge in trade. Worryingly, the cost increase is not limited to the shipping industry. At the end of last year, automakers also faced a shortage of supply due to an unexpected surge in demand. Semiconductor supply bottlenecks have forced factories to shut down. Rising LNG prices set a record earlier this month, in part because of a cold snap. Prices of other commodities are also soaring; metal prices are rising rapidly due to stoppages of mines in Africa and South America and growth in Chinese industrial production. Wheat, soybeans, rice and corn also rose in price: transportation costs, weather, and COVID-19 related hoarding and other factors played a role. However, it is wrong to overreact to the temporary increase in inflation. Consumer prices also soared during the 2008 financial crisis – a factor in the wave of protests in the Arab world. The trend of price increase rapidly subsided, which was not included in the long-term expectation, and did not promote the price rise of the most important input (labor) for production. In order to prevent inflation, the European Central Bank raised interest rates twice in a row in 2011, which is considered to be a mistake of arrogance in the history of monetary policy. Central banks should be wary that price expectations remain under control. The lessons learned from past business cycles may not apply: efforts to increase the “resilience” of the supply chain may be worthwhile, but they also increase the cost of doing business. At least in the short term, some types of economic activity may have to operate under constraints. Protectionism and trade tensions also increase costs, as British companies have experienced since the end of the brexit transition. There are also differences on both sides of the Atlantic. The European Central Bank (which announced its latest interest rate decision on the 21st) is facing another month of deflation and the additional challenge of soaring euro exchange rate. At the same time, a weak dollar will only amplify the inflationary pressure on the US. The Fed’s communication also shows that the central bank is more tolerant of inflation. The option price implies the market’s forecast of inflation, but the forecast results are inconsistent on both sides of the Atlantic. For now, however, this should be a particularly strong reminder that the Fed has not completely abandoned price stability as a goal.
(editor in charge: Zhu Xiaohang)