Inflation has caused concern for
many people in our industry. What's worse is what happens if the economic
rebound experienced early this year grinds to a halt because of the effects of
ineffective government policies to control the Delta variant of Covid-19?
Well,
then we would have “stagflation” – stagnated growth coupled with inflationary
prices. A nightmare scenario for any consumer-facing industry, let alone ours.
The last time stagflation plagued the global economy was during
the 1970s. In that instance, stagflation was ultimately tamed by a combination
of tight monetary controls – meaning higher interest rates – and economic
stimulus via reductions in personal income taxes. But it took nearly a decade
to reign in the effects of stagflation in what proved to be a slow, painful
process.
Today, stagflation remains a possible economic outcome of the
global pandemic. Still, at the moment, global growth remains strong as
economies reopen from the doldrums of 2020. Unfortunately, however, that growth
has come with a jolt of higher inflation. In turn, for central banks around the
world, inflation raises a red flag of caution for economies struggling to
recover from the ill effects of the pandemic. And there’s always the potential
for governments to ease back on their public spending.
A
balancing act
It becomes a bit of a balancing act for central banks. Inflation
could be tamed with higher interest rates (in effect, the cost of borrowing
money goes up). But this comes with the risk of squashing economic recovery as
companies put off expansion plans due to the higher interest rates to borrow
money. Hence, there’s a reluctance on the central banks to put on the breaks
just yet. Moreover, despite rising global inflation, the problem is heavily
tilted towards the US economy.
In a recent article published by Erik Norland, executive director and senior
economist of derivates exchange CME Group, entitled, “Surging Inflation is a U.S. Phenomenon, Not a Global One,” he says that
“surging US inflation has outpaced inflation in Europe, China and elsewhere, as
the rate hit a 13-year high of 5.4% in June and July.” And Norland goes on to
explain that “rising US inflation may be the result of divergent employment
benefits or a consumer spending boom fuelled by the government’s fiscal response
to the pandemic.” The following table illustrates his points. Even if we exclude
volatile food and energy costs, US inflation continues to run higher than much
of the rest of the world. Note: Data
are annualized inflation rates based on July 2021 monthly results for
country-specific consumer price index (CPI). The US government's aggressive approach to unemployment may
explain why US inflation remains high compared to other countries and regions
such as Europe. When the US economy tanked in 2020, the Biden administration
pumped literally trillions of dollars into the economy. Which, in turn,
followed broadly expansionary policies of the Trump Administration that
included tax cuts and direct government stimulus. In short: many American
citizens received direct government subsidies. Indeed, when unemployment spiked in 2020, there was a lot of
money put directly into the pockets of average Americans. Not surprisingly,
consumer spending soared on a wide range of consumer goods. With extra money in
their pockets, Americans went spending. And to the extent that global supply
chains have been playing catch up ever since. See what
I mean? US GDP has soared since the depths of the pandemic-induced economy of
2020. But soaring demand comes with added costs, namely price inflation.
Inflation is insidious in many ways. Often, it originates with tight labour
markets. However, high raw material prices can also contribute to more
significant overall inflation. For example, look at cotton prices: Higher
consumer demand can also affect inflation. Government stimulus plays a role
here, along with pent-up consumer demand for stuff. Never underestimate
consumer psychology. Hence, supply and demand are imbalanced. Additionally, there's also the psychology of our industry. US
apparel imports are up sharply from pandemic lows. Still, imports have really
taken off over the past few months as brands and retailers accelerated
purchases. They did so to avoid a repeat of 2020 when shelves stood bare or
were stock with out-of-season merchandise. What's added to the urgency is the
spreading Delta variant of the Covid virus. It's a wild card in many ways.