7 minute read
Will inflation sap consumer confidence or boost wages and the economy?
The Big Question sheds light on a topical issue of global relevance, providing a platform for some of Bond’s best and brightest academics and alumni to share their unique perspectives.
Kuldeep Kumar is a Professor at the Centre for Data Analytics at Bond University. He is also a Fellow of the Royal Statistical Society and a Chartered Statistician.
The last two years have been unequivocally tumultuous for the global economy. After being hit with the negative shock of the Covid pandemic, firms and consumers also had to face additional shocks stemming from the extended closure of the Suez Canal in mid2021, and more recently, Russia’s unprovoked conflict with Ukraine. These unprecedented events have had wide-ranging economic consequences, with perhaps the most salient of these being inflation.
This inflationary surge has many potential causes, one of which is the supply chain disruptions generated by the pandemic. Many economists posited that supply chain disruptions caused by factory closures, quarantine restrictions and a reduction in labour productivity, have exacerbated inflation. The simple reason for this is that as Covid restrictions eased, aggregate demand increased, while supply remained constrained by input bottlenecks, thus raising the price of many goods and services. For example, it was reported that supply chain issues in the production of semiconductors, which have very limited substitutes, led to widespread increases in the price of manufactured goods such as cars and other electronic products. Economic theory corroborates these narratives highlighting the role of supply chain interconnectedness in amplifying economic shocks.
Russia’s invasion of Ukraine only seems to be fuelling this inflationary activity more, with oil prices being the most immediately impacted commodity as Russia is one of the largest producers of crude oil. This conflict will also further exacerbate a global semiconductor shortage as Russia and Ukraine are critical suppliers of raw materials used in their production.
Thus, it is clear that supply chain issues and conflict have undoubtedly contributed to the high price levels we observe around us, but the question remains - what will the consequences of this be? In this respect, the jury is still out. As this inflation continues to persist, interest rates may rise, and the growth rate may go down. This could lead to further ramifications for households, who have already faced increased prices for the last several months and may incur greater mortgage payments in the future. It has also been posited that supply chain constraints, while increasing inflation, could increase employment, as firms look to build up inventory as the economy recovers. Additionally, adhering to the logic of the traditional ‘Phillips curve’ would lead us to conclude that rising inflation should be accompanied by rising employment.
Overall, while the causes of historically high inflation in advanced economies are largely clear, the immediate and longrun effects of this phenomenon remain uncertain. The degree and intensity of interest rate increases by central banks, as well as wage growth decisions by firms, will determine whether we can control inflation without harming households, or whether the economy will have to endure a period of pain as we apply the brakes.
Erica Santosaputri (Class of 2000) is currently Head of Liquidity Risk at APRA. She has 15 years-plus experience across banking and financial services.
To control the spread of Covid, governments across the world put in place various measures to restrict individual and commercial activities. As a result of this, the supply chains – the process involved in production and transportation of goods – have been disrupted both globally and locally.
Whilst the economy was on its way to recovery, a major war broke out in Europe. Consumers around the world, including in Australia, have noticed the price of almost everything is now more expensive than last year, from housing to petrol to even vegetables or fruits.
Economy lesson that we learnt from university: inflation is basically a rise in price. Both the pandemic and the war have exacerbated the inflation hike over the last year. As the world is recovering from the pandemic and the war is only temporary (hopefully), is inflation here to stay or is it just a temporary phenomenon?
As per the supply and demand theory, we need to pay attention to the consumer demand or behaviour. As prices increase, people may accelerate their purchase of goods and by doing so they increase demand and decrease supply, pushing the price further up. On the supply side, we also need to pay close attention to the businesses. Those struggling to meet the demand due to scarce personnel (due to pandemic) and the higher cost of raw commodities will either be forced to reduce supply or increase the price they charge to maintain company profits.
Historical data has shown a very strong correlation between wages and inflation, however which of the two is the cause and effect? A wage push inflation is where we see increases in cost of goods and services because of rises in wages. The overall increase in the cost of goods and services has a circular effect on wages. Higher wages will be needed for the increased price of consumer goods. It is a chicken and egg discussion, and it is not clear which comes first – wage increases or price increases.
I believe that the events that are happening now are temporary. And given that, I have less certainty that the type of inflation we’re experiencing now would boost wages and/or increase consumer confidence in the near term. Notwithstanding that this temporary uncertainty may last longer than expected – well, none of us would have expected to still be dealing with Covid after three years. At the end of the day, no one can predict the future.
Pieter Beukes is a MBA graduate (Class of 2003) and Executive Manager, National Supply Chain, ALDI Australia.
The world has been resetting for the past three years and what we thought was normal is no longer the case. I think it’s fair to say we will never return to a pre-Covid world. Will inflation sap consumer confidence? Yes. It’s already happening. Fuel prices are at record highs. Supply chains are still suffering backlogs due to isolation rules. Interestingly the shipping disruptions were due to these isolation rules, and not a lack of capital equipment. Loading and unloading crews were reduced by 50 per cent and in some cases more, meaning containers were literally not being loaded or unloaded in time, before the next ship was due. This created massive supply disruptions last year, with companies paying the highest prices for priority freight. These costs have of course been passed onto consumers, which you now see in the CPI and on your weekly shopping bill. However, because of this bottleneck, or whiplash effect, we should see CPI prices reduce this time next year. The reason is that more capital equipment, in the form of ships, containers, cranes etc are not required to support shipping demand, but simply the crews needed to man them. Through-put at ports has already increased this year, and will continue to do so, contributing to increased stock levels and ultimately lowering of freight costs.
Will wages and the economy be boosted? Yes, but it will take time, for two reasons. Firstly, manufacturing and services are returning to Australia. Governments and companies are prioritising security of supply over cost, and are recalibrating their supply chains as a result. Government spending on infrastructure, the domestic defense industry and healthcare is enjoying renewed focus. In the supply chain industry the demand for talent has never been greater. Companies who fail to create a flexible work environment and offer competitive wages will lose out. Secondly, Australia is a commodity-driven economy, and our commodities are set to boom, across the board. The unprovoked war in Ukraine will lead to an increase in the price of agricultural commodities such as wheat, sunflower oil and corn. This will positively impact Australian farmers and rural economies. Additionally, the Covid pandemic has accelerated the drive to net zero and reinvigorated the priority for clean energy. This bodes well for Australia’s mining sector, and may well lead to another resources boom (sans fossil fuels).
In summary, Australia is still the lucky country, and the current headwinds should be short-lived and be replaced by economic growth, which will likely exceed expectations in Q4 and into 2023.
The views & opinions expressed in this article are my personal views and not those of my employer.
