Weekly Brief: War on Inflation
- Waseda Economics and Finance Forum
- Dec 29, 2021
- 3 min read
Updated: Feb 15, 2022
While the non-investors start enjoying the ‘Christmas Season’, the people at Wall Street tend to brace for impacts from the volatile market and adjust their positions for next year. Economists minutely calculate the chances and risks of their next season, and traders rethink their positions to provide returns to their investors and also how to provide liquidity to the market. However, this process became busier than ever for this year. Let’s go through the keywords of the global markets for this week, and forecast its impact.
Supply Chain, Inflation & Tapering
What is the Supply Chain? Like the world itself, Supply Chain is a network between a company and suppliers to produce & distribute products to the final buyer. And this Supply Chain was ‘destroyed’ by COVID-19. Let’s take a deeper look at the Supply Chain issue in the context of markets. 1. Last March, the outbreak of COVID-19 slashed both the supply and demand. People were dying out there, and the demand was extremely low towards almost every kind of goods. An unprecedented number of initial jobless claims were reported, and there were no reasons for the demand to ‘exist’, at that time. 2. However, as leading Pharmaceutical companies such as Pfizer, Moderna, and AstraZeneca succeeded in making a vaccine in early 2021, and that was way earlier than human beings expected. The expectation for the ‘reopen’ stimulated the economy, and that expectations were reflected directly in the stock market as well. S&P500 opened 3,714.24, and the most recent close was 4,712.02 (December 10). 26.8% simply exceeds the target return of major hedge-funds, which usually targets 15~20%. Considering 16.4% in 2020, 19.4% in 2019, -11.22% in 2018, 16.1% in 2017, the rise of 26.8% of SPX would be considered as the biggest rise of the world economy in human history. 3. However, in June 2021, a variant that causes breakthrough infection changes the gear once again. Delta, the new variant, prevented people from working again, and that directly moved to a ‘low supply’. Poor Supply and High Demand. This basic economic concept brought extreme inflation. Let’s look at the table of CPI to explain the current inflation.
‘CPI’, Consumer Price Index, is one of the most widely used indices to explain inflation. And the last inflation announced (October 2021) marked 6.245% of rise. As you can see from the table, human beings have never recorded more than 6.245% since last 1990, and that is the reason we call this ‘a war on inflation’. Steady inflation is considered a signal of economic growth. However, if you cannot control the speed of inflation, it will make a bubble of our economy, and start to break down every single part of our society. Considering that August 2008 CPI was 5.308%, the number 6.245% seems to be way too risky.
4. So what is happening now? Get ready for tapering. Tapering refers to traditional monetary policies from central banks that target to stabilize the economy. It would stop purchasing assets (mainly treasury bonds) from the market and slow down the liquidity-providing for the economy. In this situation, major banks would get pressure to raise their interest rates, and the cash-flow of the market would be tightened. It leads to the reversal of Quantitative Easing (QE) policies. As interest rates rise, the liquidity in the stock market can get short/long-term effects, moving downwards. Jerome Powell, the Federal Reserve Chairman, said “We should speed up bond tapering to counter inflation” at the last FED FOMC meeting, and professionals are predicting January 2022 as the start of it.
Thesechipmaker is the four main steps of supply chain issues, which is concluded to inflation and tapering. While the supply chain revealed serious problems and shortages, industries and companies that highly depend on the supply chain had to go through a hard time as well. The semiconductor industry is considered to be one of the biggest victims of supply chain problems, and major chip makers such as Intel/Samsung Electronics/TSMC, not surprisingly, tend to draw a highly similar chart such as below.
It is because these chipmakers’ production and distribution were not able to follow the speed of the buyers, and their earnings had to get the impact from it.
5. Lastly, the new variant destroyed the economy once again. Omicron, which appeared last November in Africa, slashed the stock market once again, and that might make supply chain issues worse. 30 November 2021, Japan closed the borders once again, and sectors such as aviation, semiconductor, etc. tumbled from its recovery. What is the next step of this war on inflation?
References
Akhilesh Ganti. (2021, August 19). Tapering. Investopedia. https://www.investopedia.com/terms/t/tapering.asp
Will Kenton. (2021, August 29). Supply Chain. Investopedia. https://www.investopedia.com/terms/s/supplychain.asp
Brooke Sutherland. (2021, December 11). 2021 was the year of Supply Chains. Bloomberg.
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