Macro Insights Weekly: Varieties of inflation trend

Amid reviving demand and some cases of supply disruption, inflation rates have begun to climb in many countries.
Taimur Baig, Duncan Tan12 Apr 2021
  • Demand rebound is being supported by historically large stimulus measures
  • The supply side is beset with idiosyncratic factors
  • From capacity constraints on shipping to assembly line disruptions…
  • … from transportation bottleneck to extreme weather…
  • …a wide array of imbalances on the supply side have materialised
Photo credit: AFP Photo

Chart of the Week: A major tailwind

Concerns about stretched valuations and investor exuberance, as well as the possibility of a risk-off environment around Covid resurgence notwithstanding, cost of funding and availability of liquidity are highly favourable. Both in the EU and US, Financial Conditions Indices are at multi-year highs presently, acting as a major pillar of support for this year’s worldwide rebound in activities.

Commentary: Varieties of inflation trend

Amid reviving demand and some cases of supply disruption, inflation rates have begun to climb in many countries. Admittedly, inflation is by no means at risk of becoming unanchored, and it is hard to see a sustained rise inflation in the medium terms, but conditions are ripe for a short-term spurt, in our view.

Consider the demand side, with around USD5trln in stimulus measures on track to support the US economy this year and beyond. Supportive policy measures are likely to remain exceptionally accommodative in the EU, Japan, and the US. Even if EM economies cannot provide support in matching magnitude, they are not unlikely consolidate any time soon either. We are not sure if these measures will usher in a major boom in investment, but we see consumption and public spending on the rise, which will be sufficient to keep the demand for a wide array of goods and services high for an extended period.

Demand rebound of the past couple of quarters has been accompanied by a pick-up in inflation momentum, with China, EU, and the US running at the 2-4% rate. Some of this is base effect related, but the sequential pick-up in demand and price momentum is also marked.

What about EM Asia? Our measure of inflation momentum finds it mimicking the latest reading from China. After dipping sharply last year, inflation momentum has picked up in Malaysia, the Philippines, South Korea, and Taiwan. Even Singapore, typically a very low inflation economy, is undergoing a rare rise in inflation momentum presently, as per our estimates.

The supply side is beset with idiosyncratic factors. From capacity constraints on shipping to assembly line disruptions, from transportation bottleneck to extreme weather, the pandemic has caused a wide array of imbalances on the supply side. Supply shortage of semiconductor chips has caused disruption in auto and appliance production, while container ship movement disruption has pushed up the price of alternative routes (e.g. air freight). Looking at the latest readings of the IMF’s commodity price database, we find a variety of inflation trends.

Soybean prices have soared over the past year, reflecting the seemingly insatiable demand from China for feedstock. Rice price, after rising markedly last year, has flattened in the global markets for the time being.

Sharp rise in the price of Nitrogen has pushed up fertilizer prices, both reflecting a generalised rise in demand for food grains. Palm oil price has been on a relentless uptrend, reflecting tight supply (worker shortage in plantations due to the pandemic has played w role) and strong demand worldwide.

After severe winter weather-related disruption in the US, natural gas production has come back online, reversing some of the price spike seen a couple of months ago. Crude oil has risen to around USD60/barrel, as Opec production has been stable and demand has picked up.

As global demand for electronics has risen, so have the prices of a range of industrial metals. Production has not much of an upside in the near term, so the factor to watch is if input price rises will translate into consumer goods inflation shortly.

Taimur Baig

To read the full report, click here to Download the PDF.

Taimur Baig, Ph.D.

Chief Economist - G3 & Asia

Duncan Tan

FX and Rates Strategist - Asean

Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here.

The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR

Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.