09.April.2022 – World
Is inflation here to stay with us Post Covid-19 world?
Deflation was the biggest concern before COVID-19 hit us in 2020. However, inflation has been soaring, but whether it will continue or not is still in debate.
What has changed so far?
Factors for deflation before COVID-19
- Cheap goods and service from China
Since China joined the WTO (World Trade Organization) in 2001, Chinese goods have been exported to all the countries around the world. With its cheap labor and cost of production, Chinese export goods have contributed to low price level.
- Drop in oil price cause by the Shale gas
The rise of the Shale gas has been met with resistance from the traditional oil rich countries, such as Saudi Arabia which regarded the Shale gas as a potential threat to its dominance. Hence, they started to pump more oil into the market, causing lower price of oil to render the shale gas economically unviable. Low oil price contributed to low price level.
- Decreased demand from aging population
Many advanced countries have aging population structure, with Japan being the most well-known example of aging society. As aging population consumes less, the decreasing demands for goods and service have led to low price level in many countries.
- The Amazon effect
With the rise of e-commerce, companies like Amazon have been able to cut supplying goods at a low price to consumers by having an online store and platform. Unlike the traditional brick and mortar stores, these companies have low cost in running online business and hence was able to offer low price goods to customers, effectively.
Factors for inflation after COVID-19
- Supply chain disruption and isolation of China
The COVID-19 has led to de-globalization, where each country now is seeking to source all of its supply chain within a country. Unlike in a globalized world where countries would specialize in the production of goods that they have comparative advantages for, now all countries would have to produce everything more expensively.
- Movement away from oil and rise of clean energy
Advanced technology is driving the development of clean energy to replace the traditional oil energy which causes pollution. However, clean energy is still relatively expensive and is not economically viable to completely replace the oil energy.
- Increase in money supply and liquidity
With unprecedented amount of unlimited quantitative easing to alleviate the economic damage done by COVID-19, easy money is driving up the price level. This is a simple economic concept: the more money there is, the higher the price level.
- Pent-up demand
As much as the years 2020 and 2021 were harshly struck by COVID-19, many people around the world were not able to enjoy travel or outdoor activities. With easing of restrictions and going back to normal life, pent-up demand is appearing in some industries, which is leading price level upwards.
The factors that have influenced price levels seem drastically different before and after COVID-19. Which factor would triumph in the post COVID-19 world?
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