Global supply chain restructuring boosts international inflation

CMF China's Macroeconomic Analysis and Forecast Report (the first quarter of 2022) released recently focused on this "global" inflation, and pointed out that the expansion of fiscal and monetary policies in developed countries around the world is the necessary condition for this round of inflation, and the shortage of commodity supply caused by supply chain restructuring and geopolitical conflicts is the trigger for this inflation. However, the retrogression of globalization may not be conducive to the suppression of inflation. Generally speaking, although inflation is not strictly established in China, in the face of international inflation, China should adopt a more active and expanded fiscal policy and monetary policy to realize the stable operation of the economy while the domestic consumer price index (CPI) is at a moderate level.

"This inflation has very obvious structural characteristics, and the inflation characteristics reflected in different types of countries are different." The report pointed out that among developed countries, producer price index (PPI) and CPI of almost all developed countries except Japan have risen rapidly. In developing countries that rely on commodity exports, CPI is not much higher than before, and PPI has a downward trend in 2021 compared with developed countries. When analyzing the impact of global supply chain restructuring on this round of international inflation, the report pointed out that the factors that triggered or aggravated this round of inflation already existed before the Trump administration. With the outbreak and spread of the epidemic, under the global demand shocks, inflation was fully manifested under the influence of supply chain restructuring.

On the one hand, the shortage of containers has become an important bottleneck limiting the global transportation capacity. After the outbreak of the epidemic, the labor participation rate in developed countries has dropped off a cliff. Even after nearly two years of restoration, the labor participation rate in developed countries is still far behind that before the epidemic. Labor shortage superimposed container shortage has become an important reason for the PPI rise in developed countries. On the other hand, the chip industry has become the "hardest hit" of the global supply chain break, which has affected the current inflation trend to some extent. First, after the outbreak of the epidemic, the global demand for chips for medical supplies soared, crowding out the supply space of chips for other industries. Secondly, producers' expectation of commodity demand recovery brought by global economic recovery is insufficient, which leads to decoupling of supply and demand, and to some extent, aggravates the problem of chip supply chain breakage.

Before the outbreak, with the restructuring of the global trade system and trade friction, the global production network had been slowly adjusted. The production of many commodities with high production and labor costs began to migrate to some Southeast Asian countries. Affected by trade friction, the production of high value-added goods began to return to developed countries, which made the global production network in a relatively unstable state for a long time. In this context, it is difficult for the production network to cope with the impact of rising demand.

In order to solve the structural problems such as hollowing out of domestic industries, declining competitiveness of manufacturing industry and rising unemployment rate, major developed economies have accelerated the implementation of the "re-industrialization" strategy in recent years. For the purpose of safeguarding national economy and national security, the western countries, led by the United States, have strengthened their concern for supply chain security on the grounds of responding to the epidemic. In addition, in order to maintain the hierarchical order in the traditional supply system and the dominance of western countries, developed countries have formulated competitive strategies to ensure the advantages of international division of labor, initiated the artificial adjustment of supply chain, increased production costs, and injected uncertainties into the global economic development.

In this round of inflation, the disharmony between supply and demand, the obvious phenomenon of destocking, the impact of the epidemic on the transportation network, and the loose fiscal and monetary policies of developed countries are all driving the rapid rise of commodity prices, which are transmitted to different countries and regions through trade channels, further stimulating the occurrence of inflation.