How the OMICRON Variant is expected to sustain Rising Inflation

0

The post COVID world has been observing massive heights in product price/inflation. However, it remains a grey area if the trajectory is long or short. Let’s first go through detrimental aspects of inflation in terms of the economic environment, global supply chain, policy regulations, demand factors, cost-push factors, rising wages, rising oil price, and how it’s linked with the pandemic outbreak.

The current crisis of inflation can be linked to the frequent flow of resources, interruption in the global supply chain, and demand factors in the economic environment. I should state that these are not conclusive factors and multiple things need to be considered for a more definitive report.

 

The frequent flow of resources

This means increasing the flow of resources in the world economy. For instance, to tackle the situation presented by COVID-19, the US Government had introduced different relief packages and injected $1.9 trillion into the economy. This must-have contributed to the country’s inflation (Galloni, 2021).

Further, resource utilization has been shifted from services to goods. More people need physical items to help in dealing with the pandemic than they need services; that’s goods. This has affected the global supply chain.

 

Interruption in the global supply chain

Continuous lockdown and business closures have severely affected the global supply chain. There is an increasing lag time between demand and supply of goods. That is because of factory closures and the redundancy of workers made during the unprecedented time. So, it’s taking time for the factories to get back to their full potential.

However, the outbreak of another COVID variant, Omicron, has further created uncertainty in the economic environment, and once again, we seem to be existing in uncertain times. (Tan, 2021)

In simple words, the business and ports were steadily getting stability in the fight against the crisis. Now, the outbreak of Omicron has further stressed the supply chain as there is increasing anxiety among business owners if they should take the risk of paying demurrage charges on their expected shipment.

The leading economist at Oxford, Mr. Sian Fenner, said ” Supply chains remain vulnerable to pandemic-related disruptions, with the Omicron variant highlighting that the crisis is not yet over’’ (Tan, 2021).

So, if the crisis is not over, it’s wise to expect continuity of inflation around the globe. Further, China as one of the prominent suppliers to the world economy has doubled restrictions and are ensuring strict checking on the ports for cargo and ships coming into their country in an effort to stop the virus.

Likewise, China is expected to further intensify its zero COVID measures to avoid any adverse impacts of the new variant. These measures can lead to extreme shortages of shipping containers and other key manufacturing components. There has been massive order backlogs in areas of consumer products, in the automotive industry, core electrics, etc.

So, Chinese restrictions can further worsen the situation as some of the busiest world’s ports are found in China. For instance, Shanghai, Ningbo-Zhoushan, and Shenzhen rank first, second, and fourth respectively in the world. Similarly, there has been a massive disruption on these ports for closures, floods, and a shortage of containers.

These factors have carried massive logistical challenges for the shipping and air freight industry. So, there have been constraints of supplies and leading to lag for the multi-year. Get an idea from the fact that only less than half of ships timely arrived at their destination in 2021 (Tan, 2021). So, supplies are getting constrained and this leads to higher prices and inflation.

It’s important to note that China is one of the top suppliers globally and contributes around 13.45% of the global exports (ChinaPower, n.d.). It’s equally important to note that main Chinese exports include broadcasting equipment, computers, circuits, telephones, etc. Further, it’s also known as the factory of the world (BAJPA, 2021). It’s a safe assumption that a major disruption in China affects the rest of the world.

The second major contributor to the world’s exports is the United States (contributing around 8.98% of the world’s global exports) (ChinaPower, n.d.).

The fear is not different there as well. 

As per remarks made by MS. Janet Yellen (US Treasury secretary), the negative feeling brought by Omicron are expected to intensify supply chain problems and might lead to depressed demand. So, nothing is clear at the moment, and things need to be balanced between health and economy as both are living essentials. (Shepardson, 2021)

She further pointed out that a significant decline in the US economy was observed with the outbreak of the Omicron  variant, and things are not clear now. However, still, there is room to evaluate (Galloni, 2021).

In the meantime, the higher demand for labour has led to higher payroll costs, higher costing, higher prices, and higher inflation around the globe. That’s a clear example of cost-push inflation (Kenton, 2020). This is the most varying part of inflation due to irreversibility, as wages once increased, remain on heights; otherwise, there may be demotivation and human issues on part of the labour.

All these further prove that the Omicron variant has a higher risk of sustaining or worsening the global surge of inflation. It’s something that can highly impact and contribute to the global economy.

However, another side of the picture is that a serious wave of Omicron can discourage consumer spending structure, lead to lower employment and lower demand for the goods. In return, this will relax the shipping industry’s bottleneck and improve the global supply chain. That’s the same expected situation as happened during a big wave of COVID-19 last year (Hartman, 2021).

 

Increase of an oil price globally

Oil prices cannot be ignored when we speak about global inflation. An increase in oil price directly or indirectly impacts the end product price. For instance, in the case of goods made of petroleum products, the price is directly affected. On the other hand, an indirect impact is when the cost of the goods increases due to the higher cost of transportation. That’s an example of cost-push inflation as product prices need to be increased due to the higher cost of transportation.

In other words, an increase in the oil price is expected to inflate product prices worldwide. But on the other hand, decreasing oil price is expected to reduce overall inflation due to the cause and effects relationship. In the last three decades, the fluctuation in inflation can be more linked with the expectation of consumers regarding future inflation.

The current studies suggest that price expectation for the Brent futures has simply doubled than last year. Brent Crude oil is a major benchmark price for purchases of oil worldwide. So, this world’s expectation is leading to further increase in the prices, like expected price index has increased from the 1.6% to 2.9% for the next five years.

 

COVID and oil market outlook

The post-COVID world is observing a sharp increase in oil prices. It’s due to the continuous demand for oil throughout the world. It’s further supported by the increase in gas price, higher consumer demand, restrained production by OPEC, and supply disruption due to natural disasters, etc.

So, these disruptions and hurdles are expected to keep petrol prices higher at the rate of $74/bbl in 2022 and expected to decline to $65/bbl by 2021 as the world recovers from the effects of the pandemic (PETER NAGLEKAL, 2021).

However, an outbreak of Omicron can lead to a different market outlook. For instance, the closure of businesses and world trade can lead to lower demand and lower prices for the products. Hence, leading to lower inflation in the economy. Still, that decline will most probably not be long-lasting by all indicators.

 

Three main reasons for global inflation – and OMICRON

Generally, current global inflation can be linked with the following three causes.

  • Increased money was supplied in the economy to counter the effects of the business closures. This led to an increase in product demand and inflation for the world.
  • Major supply disruption has been observed in the big exporting countries like China and USA. So, it has affected the distribution of goods throughout the world.(Patton, 2021)
  • The higher cost of freight/import has increased the cost of manufacturing (expensive raw material) throughout the world. Such an increase in the cost has led to an increase in the price of the products and general inflation.

The increased uncertainty and panic atmosphere that COVID initially brought led to all three above, and these led to an increase in inflation rates worldwide. With the onset of the Omicron Variant, there’s a strong chance that these conditions will be intensified, leading to potentially higher rates of inflation or sustaining the already high global inflation rates longer.

 

My Conclusion

Inflation is when product prices increase in the economy. The price increase can be due to demand-pull or cost-push. Demand-pull is when product prices increase due to higher demand for the product in the market. Similarly, cost-push inflation is when the product price increases due to an increase in the cost of production e.g. price of components, raw materials, labour, transportation costs, etc.

Current global inflation seems to be mainly derived from demand-pull inflation. The post-COVID world has observed higher demand for the goods. However, businesses worldwide were not prepared to meet and expect such a level of demand.

So, increasing demand became the cause of the problems in the global supply chain. The business and ports were battling against disruption, but the recent outbreak of Omicron has further complicated the situation. Ergo, policymakers, business owners, and traders worldwide have been in a grey area regarding the future and the expected extent of this disruption and its impact on global inflation.

Likewise, the price of crude oil has a massive impact on global inflation. For instance, an increase in oil price is expected to increase inflation and vice versa. Also, the expectation of the consumers and investors has been found to dramatically impact future inflation levels. As at now, the world is still unable to specify the direction of its trade due to the extent of uncertainty that these outbreaks introduce into the equation, not to mention problems in supply management.

I hope you enjoyed the read. Hit me up and let’s keep the conversation going! I read all the feedback you send. Also, feel free to throw at me topics you’d like to read or hear my thoughts on. You can always head to my Calendly to schedule a quick chat by going to calendly.com/maxwellampong. Or connect with me your own way through my Linktree: https://linktr.ee/themax.

These are all facts. And this has been an opinion piece.

Have a blessed week!

 

♕ —- ♕ —- ♕ —- ♕ —- ♕ —- ♕ —- ♕ —- ♕ —- ♕

 

References

BAJPA, P. (2021, 5 18). Why China Is “The World’s Factory”. Retrieved from Investopeddia: https://www.investopedia.com/articles/investing/102214/why-china-worlds-factory.asp

ChinaPower. (n.d.). Retrieved from ChinaPower Crisis: https://chinapower.csis.org/trade-partner/

Galloni, A. (2021, 12 3). Omicron could pose ‘significant’ threat to global economy, Yellen says. Retrieved from Reuters: https://www.reuters.com/business/finance/us-treasurys-yellen-says-ready-retire-transitory-describe-inflation-2021-12-02/

Hartman, M. (2021, 12 1). Omicron’s impact on inflation and supply chains is uncertain. Retrieved from Markt place: https://www.marketplace.org/2021/12/01/omicrons-impact-on-inflation-and-supply-chains-is-uncertain/

Kenton, W. (2020, 9 30). Cost-Push Inflation. Retrieved from Investopedia: https://www.investopedia.com/terms/c/costpushinflation.asp

patton, M. (2021, 6 10). Buckle Up: 3 Reasons Why Inflation Is Rising. Retrieved from Forbes: https://www.forbes.com/sites/mikepatton/2021/06/10/buckle-up-3-reasons-why-inflation-is-rising/?sh=45ffebe22f80

PETER NAGLEKAL, T. T. (2021, 11 2). Oil market developments—rising prices amid broader surge in energy prices. Retrieved from World bank blogs: https://blogs.worldbank.org/opendata/oil-market-developments-rising-prices-amid-broader-surge-energy-prices

Shepardson, D. (2021, 11 29). U.S. Commerce chief says too soon to tell if Omicron will impact supply chains. Retrieved from Reuters: https://www.reuters.com/world/us/us-commerce-chief-says-too-soon-tell-if-omicron-will-impact-supply-chains-2021-11-29/

Tan, W. (2021, 12 1). ‘The crisis is not yet over’: Omicron variant could deal another blow to supply chains. Retrieved from CNBC: https://www.cnbc.com/2021/12/02/omicron-covid-variant-next-test-for-global-supply-chain-crisis.html

 

♕ —- ♕ —- ♕ —- ♕ —- ♕ —- ♕ —- ♕ —- ♕ —- ♕

Dr. Maxwell Ampong is the CEO of Maxwell Investments Group, a leading distribution partner for impact products and services. He is also the Co-Founder of The RIO Corporation. He writes about trending and relevant economic topics, and general perspective pieces.

Leave a Reply