Commodities were already rising a lot in 2021 before Ukraine and that is do with long term underinvestment. Also fiscal is a big part of the picture with much higher debt levels and deficit spending compared to 1970s which can overwhelm any monetary impacts of rate rises.
I agree on the commodity side, but I don't think fiscal deficits are to blame for high inflation. The link between fiscal deficits and inflation are tenuous, in my view. I know the fiscal theory of the price level claims that there are strong links, but I have explained my reservations about this theory here: https://klementoninvesting.substack.com/p/musings-on-the-fiscal-theory-of-the
The only thing I might add is that de-globalism is inflationary. Cheap Chinese products were a key factor for the post-2000 disinflation/deflation. It remains to be seen however how much de-globalism is actually happening. Building a Tesla factory in Berlin (in addition to China) doesn't sound inflationary to me. Made-in-China MAGA hats might indicate the de-globalist talk ain't the walk.
However, if we look at trade intensity, there is a small drop in the US since 2015 but in Europe it is essentially stable. However, that means we no longer have the deflationary impact of increased globalisation. We just remain in place which means at the moment we have neither a deflationary nor an inflationary impact from globalisation.
Commodities were already rising a lot in 2021 before Ukraine and that is do with long term underinvestment. Also fiscal is a big part of the picture with much higher debt levels and deficit spending compared to 1970s which can overwhelm any monetary impacts of rate rises.
I agree on the commodity side, but I don't think fiscal deficits are to blame for high inflation. The link between fiscal deficits and inflation are tenuous, in my view. I know the fiscal theory of the price level claims that there are strong links, but I have explained my reservations about this theory here: https://klementoninvesting.substack.com/p/musings-on-the-fiscal-theory-of-the
Please see the figure: Fiscal Stimulus and Excess Inflation: https://www.federalreserve.gov/econres/notes/feds-notes/fiscal-policy-and-excess-inflation-during-covid-19-a-cross-country-view-20220715.html
Fiscal stimulus was the major driver of demand-driven inflation during Covid-19. It picked up in 2021 along with the supply-driven inflation. Please see figures 3 and 4: https://www.frbsf.org/economic-research/indicators-data/supply-and-demand-driven-pce-inflation/
Ok, I stand corrected. Thanks for the links :-)
Very good and original analysis, thanks!
The only thing I might add is that de-globalism is inflationary. Cheap Chinese products were a key factor for the post-2000 disinflation/deflation. It remains to be seen however how much de-globalism is actually happening. Building a Tesla factory in Berlin (in addition to China) doesn't sound inflationary to me. Made-in-China MAGA hats might indicate the de-globalist talk ain't the walk.
You could take North Korea as an example of de-globalism gone extreme, as an example of both inflation and impoverishment.
See here for how deflationary globalisation really is: https://klementoninvesting.substack.com/p/what-do-we-need-for-the-wage-price
However, if we look at trade intensity, there is a small drop in the US since 2015 but in Europe it is essentially stable. However, that means we no longer have the deflationary impact of increased globalisation. We just remain in place which means at the moment we have neither a deflationary nor an inflationary impact from globalisation.
Certain theories have aged so poorly that today one could say:
INFLATION : MONETARIST = COVID : NOVAX