The concept that globalisation has kept inflation low and the current geopolitical tensions pose a threat to this is intriguing yet not entirely accurate. While a complete decoupling of economies would indeed affect growth and increase prices, the current geopolitical tensions are unlikely to cause significant harm. The link between globalisation and inflation is not as strong as commonly believed, as other factors such as monetary policy, inflation expectations, and wage adjustments play a more substantial role.
Firstly, it is important to note that the peak of hyperglobalisation occurred prior to the global financial crisis, and by that point, the decline in inflation in wealthy countries had already taken place. Additionally, despite goods being traded more extensively than services, there has been a consistent inflation gap between the two, with services experiencing lower inflation and goods facing higher inflation after the financial crisis.
If we consider the impact of cheaper imports, it becomes evident that the consumer price basket is not heavily influenced by low-cost Chinese competition. Sectors like housing and utilities make up a larger portion of the basket compared to clothing, shoes, and electronics. Therefore, the integration of middle-income countries into the global market does not necessarily lead to reduced inflation. In fact, increased demand from wealthier households in these countries for resource-intensive commodities like meat can contribute to inflation.
Addressing Christine Lagarde’s warning about a potential 5% increase in global consumer prices due to US-China tensions, it is worth noting that the underlying estimates seem more like a thought experiment than a serious prediction. The estimates are based on geopolitical blocs formed using past UN voting records, but it is unlikely that countries like India would align themselves with geopolitical rivals just for the sake of political posturing.
Furthermore, these estimates do not account for countries finding new import sources and export markets within their own geopolitical sphere. Adapting to the situation and exploring alternative options significantly reduces the expected 5% price increase to just 1%.
However, looking beyond geopolitical tensions, other global forces are at play that could impact inflation. Demographics, specifically the aging populations worldwide, may result in reduced labor supply and increased bargaining power for workers, potentially leading to wage-price spirals. Additionally, the cost of transitioning to more sustainable technologies and eliminating outdated ones creates a mismatch between supply and demand, which is likely to contribute to price increases.
In conclusion, the threat of geopolitical fracture and damage to the global goods trading system is not as significant as the impact of structural forces such as demographics and the cost of transitioning to greener technologies. While it is essential to monitor and respond to geopolitical tensions, it is equally important to focus on these underlying factors when considering medium-term inflation.
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