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August 8, 2022
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Energy and supply chain shortages ballooning high inflation into 2022

Macro commentary by eToro analyst for Romania, Bogdan Maioreanu

While in Europe the energy crisis is increasing the electricity costs, in China it literally cuts off the lights. Gas prices are on the rise, oil prices are at levels not seen since 2018, coal prices are skyrocketing, while the price of carbon certificates has tripled. The price hikes are casting a long shadow of doubt about the initial hopes about the transitory character of the inflation, as the narrative of Central Bankers is shifting from ‘transitory’ to more ‘persistent’.

The inflation rate in the Euro zone rose to 3.4% in September, the largest level in the last 13 years, with German inflation at 4.1%, the largest level in the last 28 years. European Central Bank (ECB) president Christine Lagarde acknowledged that inflation may be above the two-percent inflation target for the remainder of this year. Lagarde confirmed that energy prices are an inflation concern, and could raise inflation to a somewhat higher level in the medium term. However, she pointed out that energy prices are mainly determined by factors outside of the ECB’s monetary mandate, urging fiscal authorities to “harness market power” to arrange better prices for energy.

Romania is already hit by the rising prices of energy driving increases in inflation. And the business confidence indicator decreased to a negative 1.8 in September from 0 in August signaling possible troubles ahead.

Across the Atlantic, Federal Reserve Chairman Jerome Powell said that high inflation could be prolonged into early next year because parts and material shortages might be getting worse. “It’s frustrating to see the supply-chain problems not getting better, in fact they are probably getting worse. It’s very difficult to say how big the effects will be in the meantime and how long they will last.”

With the global economies recovering, the demand for Chinese goods is surging and the factories making them need a lot more power. To add to the supply chain issues, China started a planned lights off action meant to keep the country on target to the emissions reduction plan, forcing businesses to halt production.  Morgan Stanley estimates that if production cuts continue at the current pace for the rest of the year, that could drag down China GDP growth in the fourth quarter by around 1 percentage point.

In an open letter to the United Nations, IRU, the world road transport organisation, IATA, the International Air Transport Association, ICS, the International Chamber of Shipping, and ITF, the International Transport Workers’ Federation, are warning that “we are witnessing unprecedented disruptions and global delays and shortages on essential goods including electronics, food, fuel and medical supplies. Consumer demand is rising and the delays look set to worsen ahead of Christmas and continue into 2022”.

A possible effect of this compounded situation is shortage of products and decreased sales for some companies with effects into stock markets already accustomed to spectacular surprise earnings announcements well above guidance. US Q3 earnings are already expected to be lower than Q2, despite GDP growth forecast of over 3%.  Also scarcity produces price increases with influence into inflation, putting central banks between a rock and a hard place. Inflation is traditionally fought off by raising interest rates, but that might not be effective at this stage of the economic recovery.

In September the S&P 500 index decreased by 4.8% making this the worst month since the March 2020 crash, and statistically October is bringing above average volatility.  The markets are still optimistic, but now are looking more cautiously at the global economic developments fearing a slowdown.

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Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.

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