Macro Insights Weekly: Inflation risk factors
- Energy prices have been a key contributor to inflation this year; expect supply side response soon
- Key food items like rice and soybean have moved past the pandemic-induced supply crunch
- But food prices will remain a major source of sensitivity in developing countries next year
- Greening of the economy will keep demand for industrial metals strong for years to come
- Despite prevailing high inflation, China slowdown has taken the sail out of precious metals
Inflation outturn in the US gets most of the headlines, but the phenomenon goes beyond its domestic factors like strong stimulus, tight labour market, and wealth effect stemming from a frothy asset market. Many items in the consumer price index that have soared lately are taking their cues from global prices.
Given the prevalence of common factors like gas, petroleum, fertilizer, and a range of food items, inflation has picked up in the Euro Area and UK, although not as sharply as in the US. Right here in Singapore, inflation has picked up in recent months, with headline inflation running at 3.2% through October, although the year-to-date average price level is up 2% over the corresponding period last year.
China, India, and Indonesia have not yet seen comparable upward pressure to prices, reflecting subdued domestic demand and incomplete pass-through of world prices at the local pump level. Still, inflation is by no means a non-issue in India, and there is a risk of fuel prices being raised in China and Indonesia.
At the component level, energy prices have soared this year. Demand for energy has jumped due to trade rebound, with gas prices jumping on account of low stock and strong demand, especially as coal usage has been discouraged. On oil, OPEC quota has held up, Shale production in the US has been poor, and transportation demand has jumped with economic re-opening. Coal has suffered from pandemic-induced supply disruptions. In all cases though, supply is coming back.
Outside of industrial economies, food prices form a large part of the CPI and represent major political social sensitivities. Scanning the production and supply of food worldwide, there are reasons to worry.
Although two major food items, rice and soybean, appear to have moved past the pandemic-induced supply crunch and Chinese idiosyncratic factors (a major spike in soybean-based feedstock demand last year), many other staples, including cereal, coffee, sugar, meat, fish, and edible oil have undergone supply shortages while meeting with sustained global demand. With no major driver of the supply-demand dynamic to ease (production is somewhat inelastic in the short run, and climate change related events are causing crop failures with increasing frequency) in the pipeline, elevated food prices could cause considerable stress in developing societies that are food import dependent. Another risk is that the USD would strengthen further next year around taper and rate increases, which tends to push up the import cost for developing countries.
There is a good chance that energy and food prices won’t keep rising due to eventual demand adjustment. But one area where demand looks rather inelastic is base metals. Demand for various metals related to electronics manufacturing continues to soar as the world turns more digital and energy transition efforts gather momentum. Low-greenhouse-gas technologies—including renewable energy, electric vehicles, hydrogen, and carbon capture—require more metals than their fossil-fuel-based counterparts. A multi-year rally in metals looks likely, although high prices of metals such as cobalt, copper, lithium, and nickel could inadvertently cause delays in climate transition.
Finally, precious metals would be obvious candidates for a rally at this juncture, as their historical role has been to act as a hedge against a broader rise in the price level. Oddly, that has not been the case. Gold and silver both jumped during the uncertainty-heavy face of the pandemic, but since then gold has been largely flat or weak, while sliver, jumping on the back to demand from China, has corrected lately with China’s slowdown. The market appears to be still rather sanguine about the medium-term inflation scenario.
To read the full report, click here to Download the PDF.
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.