Whether you like it or not, inflation will remain highly topical for the rest of the year and probably well into 2022 as well.
In recent months, currency volatility and higher interest rates (or the threat of tighter monetary policy) have invariably been associated with bouts of no-risk sentiment among global fund managers.
Rising inflation has been the root cause of more attractive, albeit marginal, bond yields in most of Europe, and rising oil prices suggest that price volatility is becoming a key concern. of economic policy.
Since the economic malaise caused by the stagflation phenomenon in the early 1970s, important academic research has been conducted on the relationship between inflation and GDP growth.
Although there seems to be a consensus on the negative correlation between high inflation and economic growth (with variable time lags), there is no clarity on what constitutes “high” inflation.
In a post-industrial economy, driven mainly by services sectors and cutting-edge technological innovation, an inflation rate above 3% could be considered excessive, but in an emerging market that is still struggling to establish a critical level. mass of infrastructure and integrated supply chains of the private sector, an inflation rate of between 5% and 7% could be considered as a “threshold” rate.
The latter term has been the subject of research by Mishchenko et al published in Banks and Bank Systems, Volume 13. In an attempt to find a compromise for monetary policy, specifically inflation targeting, the team of researchers from Ukraine and the Federation of Russia analyzed the relationship between inflation and GDP growth, using data from the International Monetary Fund (IMF) on 158 countries.
Read: The impact of inflation may be worse than the figures suggest
Deflation is worse than inflation
The key to this pioneering research was the determination of the inflation threshold (defined as the excess that has a negative impact on economic growth).
It was established that for the 2010-2017 period, 6% inflation was the global (or marginal) threshold value of the inflation rate, beyond which the economic growth rate decreased or slowed down.
Importantly, for policymakers, the results also indicated that deflation constrains economic growth substantially less than high inflation.
A more recent article by Forbes contributor Greg Petro, sheds some pragmatic light on the inflation issue, pointing to the negative effects on the retail sector (until recently) of a decade-long period of restricted price flexibility.
The highest inflation in the US is coming at a time when the world’s largest economy is growing at a rapid pace, possibly even outpacing its biggest rival, China, during the second half of the year. Consumers in the US are also full of cash, and employers are hiring at a dizzying rate.
Although not all of these trends are present in South Africa, the country shares the universal post-pandemic phenomenon of pent-up demand, which will begin to breathe new life into those industries that suffered the most from lockdown regulations, particularly hospitality and tourism.
In addition, the pandemic has reduced competition in the retail sector, which is the pulse of the global economy. According to a report by the United Nations Conference on Trade and Development (Unctad), released in May, global e-commerce sales alone amounted to $ 26.7 trillion in 2019, representing more than 30% of the total. World GDP.
Catalyst to spend before
Depending on the scope, duration and nature of the current upward trend in price levels, it should not constitute a serious threat to the post-pandemic economic recovery.
Rising prices often serve to catalyze consumers to spend earlier rather than anticipating that goods will get cheaper.
There is little doubt about the short to medium-term nature of the current upward trend in price levels, as these have been primarily caused by supply chain disruptions arising from the uneven global pattern of lockdown restrictions.
Progress with mass vaccinations and the general trend toward easing restrictions will eventually also lead to easing of restrictions on manufacturing industries and international shipping.
Financial stocks generally count as a group that benefits from inflation, once it leads to a higher interest rate environment. The same is true for energy stocks, when higher inflation is caused, in part, by higher oil and gas prices.
For now, the message to central banks in emerging markets should be clear: don’t overreact by raising interest rates when demand is still recovering.
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Dr. Roelof Botha is eeconomic advisor to the Optimum Investment Group.