MONETARY POLICY REPORT | SPRING 2021 (box 1)
(authors: Jan Hošek, Filip Novotný)
Since the onset of the autumn wave of the coronavirus pandemic, different trends have been visible around the world in industry and in certain services sectors, which have been hit harder by government measures to limit social contact and curb the contagion. These restrictions have been reflected in growth in forced (involuntary) savings by households and redirection of household demand from services to goods. The changes in consumption behaviour have been amplified by restrictions on the movement of people, massive use of working from home and the introduction of distance learning at schools. These global processes have resulted in a swift recovery (and even a short-term overheating) of industry, accompanied by strong inflation pressures. Global industrial production returned to the 2019 average as early as November 2020, due mainly to emerging economies (China in particular). Consumer demand, especially for durable goods, had already recovered by June 2020 in year-on-year terms both in the USA and the euro area, amid a persisting contraction in GDP.
With industry still making up for the loss of production it recorded in the first half of 2020, the increased global demand for miscellaneous manufactured articles has run into capacity constraints as regards the production of some specific components. One example is a shortage of semiconductors and plastics, which is slowing production in the automotive industry and elsewhere. Moreover, chip production has been hit by a fire at a plant in Japan and by swings in the weather in Texas and Taiwan. All sectors reliant on central processing units, which most household appliances contain nowadays, have thus been affected. The current shortage of plastics is due to an overstretched chemical industry. Demand for packaging materials has risen as well, partly because of an increase in parcel shipments. Capacity constraints in freight services have also proved to be a bottleneck, causing delays in supplies of commodities, materials and components and subsequent production shortfalls, especially in just-in-time manufacturing sectors. Freight rates have therefore rocketed since the end of last year because of a lack of free containers in Asian ports (see Chart 1). Moreover, the calming of the situation was postponed in late March when a giant container ship blocked the Suez Canal for a week.
Chart 1 – Container transport prices soared in late 2020
USD/container; Freightos Baltic Index (FBX); source Refinitiv Datastream
Another consequence of the coronavirus pandemic is growth in dollar prices of commodities, which have been rising almost continuously since May 2020. In March 2021, the non-energy commodity price index was up by almost 46% (the food commodity price sub-index by 37% and the industrial commodity price sub-index by 58%) and the energy commodity price index by as much as 109% (see Chart 2). Initially, these rises merely offset the previous falls caused by the outbreak of the pandemic in China and the drastic drop in demand there. Currently, however, prices of non-energy commodities are at several-year highs. Besides higher demand from manufacturing, their growth has been driven by a weakening dollar and accommodative central bank monetary policies combined with fiscal stimuli. On the supply side, the growth in commodity prices has been bolstered by sudden production outages (due, among other things, to quarantines) and intentional oil production caps introduced in OPEC+ countries (see Chart 3). Although the growth in prices of most commodities has slowed recently, the ensuing price pressures in manufacturing remain strong.
Chart 2 – Non-energy commodity prices are at several-year highs
indices based on prices in USD (1/20 = 100); source Bloomberg; CNB calculation
Chart 3 – Reduced extraction has fostered growth in oil prices
extraction capacity and oil production in OPEC+ countries; millions of barrels a day; source EIA
Industrial firms initially absorbed the rising costs in their margins. As demand has grown, however, they have started to reflect them in their final production prices. This is gradually pushing up the prices of both consumer and capital goods, and it is only a matter of time before these tendencies pass through to prices of related services.
The elevated inflation pressures have already shown up on financial markets as a rise in longer-term bond yields. Short-term interest rates nonetheless remain low, as central banks are keeping their monetary policies highly accommodative due to concerns that the pandemic will continue to have negative impacts.
The CNB’s current forecast is based on the assumption that the elevated foreign inflation pressures in industry are temporary and will fade out by the end of this year. As restrictive government measures are eased and social contact is renewed, part of global demand will be redirected back to the services sector. Together with demand for goods being gradually satisfied, this will cause the inflation pressures in the production sector to lessen. Deferred consumption is also more likely to be channelled back into services, which have been restricted the most during the pandemic. As vaccination progresses and the pandemic recedes, we expect the problems with supplies in currently overloaded global production chains to subside. The current difference between the trends in industry and services should therefore disappear as economies return to normal. This will lead to a decline in inflation pressures in the production sector next year.