This is the impact of globalization on inflation

Global Economic Update

There will be a lot of words written about Master Jay’s views on Jackson Hole’s gradual decline. We will not increase chatter.

Instead, we want to draw your attention His speech: The following figure. The chart shows that the cost of durable goods that are usually manufactured abroad has continued to decline over the past 25 years—according to Powell, an average annual decline of 1.9%. At least, until the pandemic begins. At the same time, the inflation rate of the service industry, which is usually produced domestically, is rising every year.

This is a good example of the impact of globalization on deflation in the United States and elsewhere.

For reference, the following are the changes in world trade and global GDP during the same period:

The line chart of the average growth rate of global GDP and trade (moving average centered on five years, %) shows

The part of Powell’s speech that surprised us was his belief that global forces will remain deflationary after the pandemic: (our focus)

The low-inflation model may reflect continued anti-inflationary forces, including technology, globalization, and demographic factors, as well as the central bank’s stronger and more successful commitment to maintaining price stability. ..

Although underlying global deflationary factors may evolve over time, there is no reason to believe that they will suddenly reverse or weaken. As pandemics become history, they seem more likely to continue to put pressure on inflation.

This is not in line with what we have heard in the trade world.A sort of report For example, the report issued by Citibank and The Economist Intelligence Unit earlier this week was full of examples of executives expressing their desire to diversify the supply chain or move production closer to the mainland. It won’t be cheap.

Of course, a lot of this is just talking. But we are far less confident than the Fed seems, and executives will not start putting money on their lips at some point.

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