Inflation, the Fed minutes and what it could mean for the GCC
The buzzword among economists these days is inflation. Last week’s US consumer price and producer price indices stood at 4.2 and 6.2, respectively. The question on everybody’s mind is whether inflation is a blip, or here to stay for the long haul.
On Wednesday, for the first time since the start of the pandemic, the Fed published its latest minutes, indicating that some regional Fed presidents were considering slowing down asset purchases. This statement had an immediate impact on bond yields and the dollar, which rose. The price of gold, which had reached a four-month high earlier that day, fell in the immediate aftermath.
On the other side of the Atlantic, Germany’s producer price index rose the fastest since 2011, in spite of EU output levels not yet having reached pre-pandemic levels. The European Central Bank is convinced that current inflationary price pressures are temporary and has vowed to keep up its expansionary monetary policy.
There is no denying inflationary pressures: Oil prices have risen close to 30 percent since the beginning of the year and other commodities like iron ore and copper exert pressure on producer and consumer prices alike.
Global supply chains risk being upended, companies are hoarding raw materials as demand reawakens, and there is a global shortage of semiconductors. There is also shortage of sea containers, while overland freight via trucks or rail wagons has experienced bottlenecks. All of the above has resulted in pricing pressures — the world’s largest sea container carrier, A.P. Moller Maersk, sees rates coming down only very gradually.
So, what are central bankers and the general public to make of these developments? For one, whether inflation is transient or here to stay matters a lot — especially in the US where the discourse about tapering the ultra-loose monetary policy seems to have started, albeit on a very low boil.
The trajectory of GCC economies depends on the global economy, which consumes their oil, gas and petrochemicals. Logistics, airlines and tourism also play an ever-increasing part in the economies of the UAE, Saudi Arabia and others. Therefore, what happens to inflation and how that affects central bank policies will be felt in the Gulf as well.
Whether inflation is permanent or transient depends to a large degree on wage inflation, which is not easy to assess: Unemployment levels are still above pre-pandemic levels and are set to remain there for a while.
However, in certain segments of the labor market, there are shortages of qualified personnel for hire. There is a dearth of qualified staff in construction, engineering, software development, digitization, decarbonization and healthcare, which will translate into higher wages in these sectors, even if unemployment remains above pre-pandemic levels in other sectors. Elsewhere, the workforce may be geographically mismatched to where jobs are for as long as travel restrictions remain in place. That holds true for the agricultural sector in Europe, and will feed its way back into food price inflation.
The phenomena described are going to drive the pace of inflation and eventually also inform if and when central banks taper their expansionary policies. We seem to be very far away from that point in Europe, but the discussion has moved in the US — judging from the latest Fed minutes.
This matters a great deal to emerging markets: Tightening central bank policies result in rising currencies of countries where monetary policy becomes more restrictive. Who could forget the taper tantrum of 2013, which resulted in a severe adverse impact on emerging markets? The Gulf Cooperation Council (GCC) countries are part of the MSCI emerging markets index, which would be affected by a change in US monetary policy. Still, where currencies are pegged to the dollar, like in Saudi Arabia or the UAE, the impact of a strengthening dollar would not be felt as severely as where there is no peg.
Inflationary pressures, in combination with wise stewardship of supply by OPEC+, had a favorable impact on oil prices, which, in turn, was felt in GCC economies and government budgets. In the meantime, the trajectory of GCC economies depends on the global economy, which consumes their oil, gas and petrochemicals. Logistics, airlines and tourism also play an ever-increasing part in the economies of the UAE, Saudi Arabia and others. Therefore, what happens to inflation and how that affects central bank policies will be felt in the Gulf as well.
• Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources. Twitter: @MeyerResources