Global Coronavirus Watch: Nearer-term inflation risks build

The latest US and China inflation numbers have been shrugged off by markets despite being a bit higher than expected. While we still think that talk of a shift to a new regime is premature, the risks to the near-term inflation outlook are tilted to the upside due to pandemic-related imbalances and bottlenecks.

The shipping industry is lurching from one setback to another, and disruption to supply chains and rising costs is becoming the norm. A quick return to prepandemic shipping costs seems a distant prospect, so it’s increasingly likely that higher shipping costs will be pushed up the supply chain.

Similarly, the effects of past surges in commodity prices are unlikely to have been fully passed through to goods and food prices particularly, while ongoing chip shortages could continue to push up prices.

Although we raised our 2021 CPI inflation forecasts this month, the risks to our slightly-above-consensus inflation forecasts remain skewed to the upside. Stronger core and food inflation may temper the expected fall back in annual energy inflation, but even if inflation pressures ease more slowly, we think it’s unlikely to de-anchor inflation expectations. Fundamentally, we still consider this episode to be a transitory shock.