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MAR. 25, 2022

Importing Inflation

After being dormant for many years, inflation has made a comeback in the economic news headlines as well as in investors’ worries. There are many causes of inflation over the past year, and, most recently, commodity prices have been the primary concern. Somehow less obvious but equally damaging are supply shocks.

While some disruptions might have their roots in the supply chain industry, like cargo companies reducing their shipping schedules, others can be caused by policy decisions, like the zero-COVID policy of China.
China is very stubborn about this policy. President Xi Jinping stated several times that China’s goal is the eradication of COVID. Such a task requires a lot of resources, even for a country with a significant degree of control over its citizens: Shanghai alone has 3,000 people working round the clock to do contact tracing. A lot of work is performed by the neighborhood committees, the Maoist informal police, who conduct surveillance on residents, help enforce lockdowns, and organize testing.

This strict policy has consequences spreading to the rest of the world, given how much the global economy relies on exports from China. For example, the month-long lockdown of Xi’an caused disruption and delays for leading chipmakers Micron Technology and Samsung Electronics.
Once the goods are produced, they struggle to leave the country because the main exporting ports are congested. Due to the strict lockdown measures, fewer truckers are available to transport containers to the ports; those who can reach the port cannot unload their cargo because the berths are full. Several container ships must wait at anchor outside port because fewer workers are available. This domino effect translates into higher charter rates and shipping delays, adding further strain to an already unhealthy global supply chain.

As China’s exports range from raw materials to finished consumer and industrial products, we can expect yet another inflationary pressure on top of the increasing energy prices caused by the Russia-Ukraine conflict. The inflation caused by supply shocks represents a dilemma for central banks: on the one hand, the higher prices should call for a restrictive monetary policy; on the other hand, a supply shock tends to reduce economic growth, and a hawkish monetary policy can exacerbate an economic slowdown. Nevertheless, an expansionary monetary policy can decrease the exchange rate and amplify the higher cost of imported goods. This dilemma is reflected in the different stances taken by central banks: the Fed is more active than the ECB, which prefers a wait-and-see approach.

The Zero-COVID strategy in China is not going to be lifted anytime soon, given its success in the initial phases of the pandemic and the trust that the Chinese authorities have in such strategy. There are nevertheless ways to deal with its consequences: for example, Amazon managed to create redundant logistics centers in different Chinese port cities to re-route its containers in case of lockdown or port congestion.

We thank you for your continued support.

The FAM team