In his latest policy statement, US Federal Reserve Chairman Jerome Powell commented “Inflation has risen, largely reflecting transitory factors.” The FOMC noted that “inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time” and said that “the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent.” (see here)
These comments of Federal Reserve have triggered a fresh debate
on probability of imminent “hyperinflation” and a global “commodity
supercycle”.
As per a recent report of Bank of America Securities (BofA)
after the third week of earnings. mentions of “inflation” have now quadrupled
YoY; and after last week, mentions have jumped nearly 800% YoY!
BofA analyst also concludes from the corporates’ earnings
commentary that “On an absolute basis, [inflation] mentions skyrocketed to near
record highs from 2011, pointing to at the very least, “transitory”
hyper-inflation ahead.”
As per the recent World Bank Commodity Outlook report (see
here) “Energy prices are expected to average more than one-third higher in
2021 (a significant upward revision from the October report) followed by a
smaller increase in 2022. Non-energy prices are forecast to increase 19 percent
in 2021 (also revised upward from October), but a modest decline is expected in
2022 as metal price increases partially unwind. The outlook is heavily
dependent on the path of the pandemic, with the potential for additional upside
risks if the vaccine rollout gathers pace and strong growth in the United
States generates significant global spillovers. However, on the downside, the
global recovery could yet be derailed by renewed outbreaks in large economies.”
Not being an expert on commodities of economics, I draw the
following from the discussion on “hyperinflation” and “Commodity supercycle”
1. Presently, the
consensus is revolving around “transitory hyperinflation”. There are some
technical analysts who are forecasting a prolonged bull market in commodities
(commodity supercycle) but it is far from consensus.
My views are clear on this account. I strongly refute any case
for a “commodity supercycle”. (see “Commodities
– trade “yes”; invest “no””)
2. Inflation and
Deflation are always transitory in nature. It is primarily the job of the
central bankers to manage this transition in a way that these trends do not
cause significant disruption to the economy. A high transitory inflation could
be easily compared to a cyclone that destroys the weak structures and trees
falling on its way.
The problem occurs when the central bankers persistently refuse
to use the available monetary policy tools, arguing that “it is transitory” and
“this shall pass too”. This tendency weakens the markets’ faith in central
bankers and raise doubt about their relevance per se.
We have also seen RBI following the same tendency. In past three
policy statements, the persistence of inflation has been recognized but action
has been avoided. I am sure inflation may not last much beyond FY22, but in
next few months it can destroy economics of many household, businesses and
eventually lenders.
One thing I am really concerned about is the “transitory” food
inflation. The weather in many parts of the world has been unusually dry in
past many months. Notwithstanding the forecast of IMD, I have gathered from old
farmers (who forecast monsoon based on some natural signs) that monsoon may be
below normal at least in North and North West India.
The global food prices are already running at multiyear highs
and look good for a further move north. The recent food buying spree of China
may be another indication of things to come.
