The global phenomenon of inflation is the headline for the global economy in 2021. And it is attributed to the broader price increase in essential commodities like energy, food, and metals. Observers can feel that in their daily bills and indexes, as the Dow Jones Commodity demonstrates the upward trend. It grew by an astonishing 23.12% YTD. It is up by 9.6% over five years and nearly 2% over the decade. Looking closer home, the EU agri-food sector is facing a surge in commodity prices due to the stimulated recovery of the European, US, and Chinese economies. The increases in energy and transport, and poor yields in Asia are driving the global prices high, despite improved outlook for the EU production of cereals (to increase by 5% y/y), oilseed (by 10% y/y), legumes (by 11.3% y/y) and sugar beet (by 13.6% y/y).
Economists, monetarists, and governments worldwide believe that supply chain constraints, a sudden spike in demands, and increased energy prices are the main reasons behind the ballooning prices.
It might be partially true. Let’s look at energy prices in 2021. According to the National Bank of Poland's (NBP) recent report, we see energy prices hitting a record level in European and Asian markets. The increase in energy prices translated to a rise in electricity prices which reached historical levels in Europe where it was the highest in Italy at €218/MWh, followed by Ireland, the UK, and Spain at €215, €212, and €200 per MWh respectively while being milder in Poland at the level of €139/MWh. Interestingly, the rise in Poland wasn't only driven by an increase in oil or gas prices, it was instead due to a record high CO2 emission allowances global prices.
The bad news doesn't end at energy commodity prices. The disruption to the supply chain is phenomenal, directly impacting production and contributing to higher inflation. The rise is remarkable in freight prices — at all-time highs over the decade. We also see a record-high increase in the dynamics of producers of intermediate goods. In the US, an increase north of 20% since January 2019, and in China, a rise north of 15% for the same period. In Europe, the demand doesn't seem to be decelerating any time soon as we see a rise in new orders and production all the while through a severe shortage in materials and equipment, particularly in means of transport (60%), electrical equipment (over 55%), chemical (less than 40%) and metals (approx. 25%).
Furthermore, we are living through what’s known as the “Great Resignation," where 20 million people resigned from their jobs between spring and summer in the US alone. In April, the number of workers who quit their job in a single month broke an all-time US record. Highest ever. But then it happened again in reaching July. And again in August. People who just leave their jobs, often without having another one lined up. That has exacerbated the severe shortage of workers globally, translating into a 20% shortage in the European manufacturing sector — a record-high since 2015.
POLAND: PUTTING THINGS IN PERSPECTIVE
Disposable income in the country has declined in percentage y/y (constant prices) since Q2 2020, hitting an all-time low -2% in Q2 2021. However, NBP reports a return to a more positive trend: 4% by the end of 2023. Interestingly, households' voluntary savings rate will see a somewhat stable level, north of 4.5% in 2022 and 2023 compared to the spike we have seen in Q2 2022 where it hovered near 20%. On the other hand, the labor market improvement is temporarily on hold, with wages continuing to grow significantly, an all-time high of 9.6% y/y increase in Q2 2021, and expected to remain high at 8% y/y until the end of 2023. The shortage in the workforce seems to be systematic where we can see the level of unemployment stable during 2021, reaching 3.7% in Q2 2021 and expected to decrease even further by 2023 to a little more than 2%. All of that creates an upward pressure on enterprise costs where 70% of them feel the heat on their bottom line costs.
Furthermore, both private and public consumption isn't showing any sign of slowing down despite uncertainties around public investment for 2023-2026, a deterioration in consumer sentiment, and the expiry of expenditure on counteracting the effects of Covid-19 (including the purchase of vaccines and the Polish tourist voucher) in 2022. Looking at the bigger picture where we see energy commodities (gas, oil, coal) remain elevated, the price of CO2 emission allowance is set to reach a record high of €450/tonne, in turn driving electricity prices even higher to PLN 350/MWh. Additionally, experts expect an increase in food and non-alcoholic beverage dynamics and non-food goods driven by a mix of supply chain constraints, high energy prices, and a spike in demand. The inflation isn’t ending anytime soon. We will see similar levels on average, at least in 2022 and 2023. The big question is: could a further hike in rates fix the problem? The answer is no because the problem isn't in the demand but in the supply, and any form of total lockdown will make that even worse. The genie is out of the bottle and a stagflation-like situation is more and more likely to happen.