Inflation: Down in America, up in China

According to the latest CPI data released by each country in May (or April), the current major countries in the world:

In Turkey, where annual inflation is running at 73.5%, one lira of cash is now worth less than 60% of what it was last year.

With annual inflation running at 17.1 per cent, one trouble in cash last year is now worth 85 per cent.

Then there are Britain, America, Germany and India, where annual inflation is running at 9 per cent, 8.6 per cent, 7.9 per cent and 7.8 per cent respectively, so that one dollar (pound/euro/won) in cash is now worth about 90 per cent of what it was last year;

Next South Korea, where annual inflation is 5.4 per cent and one won in cash is now worth 95 per cent of what it was last year.

Only China and Japan have done best, with inflation rates of 2.1 percent and 2.5 percent, respectively, roughly equivalent to no devaluation. We, in particular, are 0.4 percentage points below Japan’s inflation rate, making us the best performer in the world.

I have said in previous posts why global inflation is rising.

In the second half of 2020-2021, when the pandemic was still recovering and Russia did not invade Ukraine, food and energy prices were mostly at historic lows. Under these circumstances, the US government borrowed desperately to issue money, the Federal Reserve desperately printed money, and the growth rate of broad money, money in circulation, was the highest since the Second World War.

The global price is low, the Federal Reserve prints money, the US government issues money, people have money to buy, the day fell pie, all the land is taken by Americans…

By relying on the dollar’s status in the world, the Americans have taken advantage of the opportunity to pull off the world’s wool.

Of course, no pie will fall from the sky. The pie that Americans receive is the blood, sweat and food of people in other countries around the world. Americans overbuy the things that are normally produced.

The dollar is the absolute world currency and the United States is the absolute carrier of the global economy. It is a natural result that inflation in the United States is ahead of that in other countries.

After the quarantine control was lifted, American enterprises rushed to buy raw materials, reduce inventories, increase wages and increase production. As a result, since the end of 2021, both production and consumption in the United States have been extremely vigorous.

At this time, although the United States government has stopped issuing money, but the wages have risen significantly ah, Americans still have money in their hands, still buy…

This production and consumption boom, which exceeded expectations, naturally led to a rise in prices across the board, from energy to food, from used cars to clothes and toys, from rent to haircuts. This over-exuberant demand even led to problems in the logistics and inventory systems of the United States…

This further increases prices.

At the same time, many countries that supply goods and raw materials to the United States have had their stocks bought by Americans at low prices over the past year. The production of new goods and raw materials has had to be interrupted due to the epidemic prevention, and the supply cannot be kept up so quickly.

In addition, the outbreak of the Russia-Ukraine war, the global energy and food supply hit a blow, so that the general situation is further strengthened; add to that the fact that the dollar is the currency in which most of the world’s goods are priced, and inflation quickly feeds through to the United States, where inflation naturally leads the world.

Of course, these problems, put into the mouths of the Fed and the federal government, are “supply chain problems.”

In particular, I would like to mention the far-reaching impact of the war on commodity prices.

Sultan Poser, head of investment research at Credit Suisse, a bank, argues that the Russian-Ukrainian war has triggered a commodities crisis, not just because of Russia and Ukraine’s role in global energy, food and metals production, but also because of the restructuring of commodity supply chains caused by political rivalry.

When Europe refuses to use Russian crude for political reasons, Russia will have to send its crude oil to China, India and other countries in Asia via less efficient tankers and longer shipping routes. This not only greatly lengthens the time it takes goods to reach their destination, but also increases the price of crude oil at port.

Moreover, there are simply not enough large oil tankers to handle the current volume of oil demand. Even the port facilities to handle large oil tankers do not exist, meaning that Russia has to transfer a lot of crude oil, which will further drive up the cost of crude oil.

It used to take one to two weeks for Russian crude to reach European destinations for sale. Now, it takes four months for Russian crude to be sold to Asian countries, and in smaller quantities than before.

From the European side, instead of Russian crude, they use either Middle Eastern or American crude. It also lengthens the time it takes for goods to reach their destination and creates a demand for supertankers… It would also push up the cost of crude oil in Europe.

The current financial and credit system cannot support the financial needs of such large tankers to travel long distances, which will lead to further increases in commodities.

The chart below shows routing charts of global shipping compiled by Scorpio Tanker at the end of May — solid blue lines show routes of European diesel imported before the Russia-Ukraine conflict, dotted blue lines show routes of Russian oil shipped after European sanctions against Russian oil, and solid orange lines show potential or additional diesel trade routes.

Over time, this bout of inflation will subside as the world settles into a new, relatively balanced system of supply and demand and prices for commodities.

After describing the above problems, we can understand that before the new supply and demand balance and price balance is reached, this round of inflation is bound to spread around the world, no country can avoid it, it is only a matter of sooner or later.

However, in the “inflation, when will it go down My personal judgment is that the United States, today the world’s largest producer and consumer of oil, is likely to reach equilibrium first, with at least a short-term decline in inflation after 2023.

As a result, overall inflation in America has peaked and is likely to decline.

By contrast, the current “good times” in China and Japan are a complete illusion.

China’s National Development and Reform Commission said it will be able to meet its annual CPI target of 3% this year, after CPI remained stable and PPI further dropped to 6.4% in May.

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Personally, I think this is overly optimistic.

This bout of global inflation, the temporary drop in PPI, does not mean that CPI can be contained. It is a little unrealistic to expect China’s CPI to remain low given the continued high price of crude oil, the anchor of all global commodities and even consumer goods, and the recent weakness of the renminbi against the dollar.

As I mentioned in my article “China’s Inflation will eventually Come”, if the sharp decline in inflation in the past few years depended on the help of “General Pig”, then in 2022, the “Second Brother’s dividend” will already have been extracted, because the price of pork has fallen beyond all reason.

Therefore, China’s CPI inflation figures, most likely will rise.

Of course, I am always in awe of China’s economic data because of its superiority.

Since the CPI data itself is designed and released by the National Bureau of Statistics, and the raw data and subdivision weights are not public, if the country really needs it to be stable, then, I believe, the bureau of Statistics must have ways to make it stable.

When the time comes, I will no longer agree with myself.

 

 

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