Global inflationary conditions

IN 2020, the global Covid-19 pandemic presented numerous economic challenges to countries around the world. The drop in business activity, and the restricted movement of persons due to the pandemic, directly contributed to plunging economic activity in both developed and developing nations. Consumer expenditure declined significantly due to restrictions implemented to reduce the spread of the virus, resulting in economies experiencing disinflation and in some places deflation, which, when coupled with the recessionary conditions, resulted in unprecedented policy responses by central banks across the world.

The Harmonised Index of Consumer Prices (HICP), which is a measure of inflation across European Union (EU) member states, has been relatively low even before the pandemic. Low levels of real GDP growth and uncertainty surrounding Brexit kept inflation around 1 per cent, well below the European Central Bank’s (ECB) target of 2 per cent (+/- 1 per cent). Throughout 2020, inflation declined in the euro area from 1.4 per cent in the first quarter to 0.4 per cent in the third quarter before ending the year in the negative territory at -0.3 per cent. Inflationary conditions in the United Kingdom were similar with rates of around 0.6 per cent in 2020, lower than the Bank of England’s (BoE) target of 2 per cent (+/- 1 per cent). In the United States, prices moved similarly, ending 2020 at an inflation rate of 1.4 per cent, below the Federal Reserve Bank’s (Fed) target of two per cent. The world’s second largest economy China started 2020 with high levels of inflation at around 5 per cent but significant disruptions to trade and movement brought on by pandemic-related lockdowns resulted in disinflation, ending the fourth quarter of 2020 at a rate of 0.1 per cent.

Relatively subdued global commodity prices kept inflation rates low and stable as global transportation slowed to a near halt. Both measures of crude oil prices, WTI and Brent fluctuated widely in 2020. Lower demand for crude oil in transportation and manufacturing pushed prices down to US$49.87 and US$47.05 per barrel for Brent and WTI crude oil respectively in December 2020 from US$63.60 and US$57.52 in January 2020. Natural gas prices, as measured by Henry Hub, ended 2020 at US$2.54 per MMBtu, slightly higher than the year’s starting price of US$2.03 per MMBtu. Weaker industrial and construction activity in the first half of 2020 resulted in reductions in metals prices with aluminium dipping to US$1,466 per megaton in June from US$1,773 per megaton in January. Iron ore prices trended similarly, declining to US$84.73 per megaton in April from US$95.76 in January.

Monetary conditions in the euro area and the UK were already accommodative in the months prior to the onset of the pandemic. EU member states faced relatively subdued economic growth levels, alongside muted inflation expectations at around one per cent. The ECB lowered the interest rate on deposit facilities to -0.50 per cent and maintained the interest rate on marginal lending facility and main refinancing operations at 0.25 per cent and 0.00 per cent respectively in light of the pandemic. In the UK, the BOE lowered its main policy rate to 0.10 per cent to help bolter economic activity amid the shock caused by the pandemic. The US Fed lowered its main policy rate to a range of 0-0.25 per cent from 1.50-1.75 per cent to support the economy in 2020. In China, weak inflationary conditions allowed the People’s Bank of China (PBOC) to reduce interest rates to help support economic activity. The 1-year medium-term lending facility was reduced by 30 basis points and the reserve requirement ratio on commercial banks was reduced by 50 and 100 basis points for large and medium-sized banks respectively.

In 2021, there is expected to be an uptick in inflation, as lockdown measures are eased and a gradual resumption in trade and movement takes place. Despite expectations of increased inflation in 2021 as the global economy recovers, the major central banks are expected to maintain their current low and accommodative interest rates. The ECB, BoE and Fed will continue monthly purchases of government bonds through their respective quantitative easing schemes to promote favourable liquidity conditions at least until 2022. The acceleration of access to vaccines and distribution will facilitate easing of lockdown measures. The global economy is projected to expand at a rate of 5.5 per cent in 2021, moderating to 4.2 per cent by 2022. The Chinese economy is projected to grow by 8.1 per cent followed by the US at 5.1 per cent, the UK at 4.5 per cent and the EU at 4.2 per cent. Inflation is projected to pick up in 2021 as consumer spending recovers, barring any significant resurgence in infections globally. Relatively higher energy commodity prices will also add to higher inflation expectations in 2021. Overall, however, global monetary policy is expected to remain accommodative in 2021 as economies try to manoeuvre a post-pandemic economic recovery.


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