# Analysis: From chips to ships, shortages are making inflation stick
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2021-09-30
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Global Inflation Debate: Rising Gas Prices & Chip Shortages
Meta Description: Gasfltion, Chipflation, Foodflation: soaring prices and supply shortages challenge view that inflation is transitory. Central bankers and analysts foresee a
URL: https://financedigest.com/analysis-from-chips-to-ships-shortages-are-making-inflation-stickhtml

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By Dhara Ranasinghe and Sujata Rao

LONDON (Reuters) – Soaring gas prices, staff shortages, a lack of ships — price pressures globally may be picking up faster than anticipated, challenging the view that inflation will prove transitory.

Central bankers, while adamant inflation will subside, are starting to concede it may stay higher for longer as a range of issues push up the prices of goods and services and lift future inflation expectations.

Their conclusions will ultimately determine how quickly policymakers unwind the trillions of [dollars of monetary stimulus unleashed to ease](https://www.financedigest.com/analysis-g7-fails-to-reach-intervention-deal-to-ease-pain-of-soaring-dollar.html "Analysis-G7 fails to reach intervention deal to ease pain of soaring dollar") the COVID-19 crisis.

Will [central bankers](https://www.financedigest.com/inflation-fighting-central-bankers-air-climate-role-doubts.html "Inflation fighting central bankers air climate role doubts") be more focused on growth and be a “bit behind the curve? Or will they be more concerned about inflation and take the punchbowl away quickly?,” said Charles Diebel, [head of fixed income at asset manager Mediolanum International](https://www.financedigest.com/the-hidden-financial-woes-of-international-students-heading-for-the-uk.html "The Hidden Financial Woes of International Students Heading for the UK") Funds.

Here are five [key elements in the inflation](https://www.financedigest.com/inflation-in-key-german-states-eases-for-second-month.html "Inflation in key German states eases for second month") debate:

1/ GASFLATION

European and U.S. gas [prices have soared](https://www.financedigest.com/german-gas-commission-agrees-proposals-to-ease-impact-of-soaring-prices.html "German gas commission agrees proposals to ease impact of soaring prices") more than 350% and more than 120% respectively this year. [Oil is up around 50% and Goldman Sachs expects Brent crude to hit](https://www.financedigest.com/oil-hits-3-week-high-as-china-eases-covid-curbs.html "Oil hits 3-week high as China eases COVID curbs") $90 a barrel by end-2021 from around $80 currently.

Gas and electricity make up 4.8% of the euro area harmonised-inflation (HICP) basket used by the European [Central Bank](https://www.financedigest.com/governments-and-central-banks-risk-inflation-bank-of-england-has-done-its-bit-now-the-politicians-turn.html "Governments and central banks risk inflation, Bank of England has done its bit, now the politicians’ turn"). Rabobank reckons the price surge is a separate ‘shock’ that could add 0.15 percentage points (ppts) to its 2.2% [euro zone inflation](https://www.financedigest.com/euro-zone-consumers-more-optimistic-on-inflation-ecb-survey-shows.html "Euro zone consumers more optimistic on inflation, ECB survey shows") forecast for 2021 and another 0.25 ppts to 2022’s 1.8% projection.

Many economists see [higher gas prices](https://www.financedigest.com/wall-street-seen-opening-higher-but-u-s-recession-priced-in.html "Wall Street seen opening higher but U.S. recession priced in") as here to stay, due to slowing U.S. output, rising costs of [carbon emissions permits for polluters](https://www.financedigest.com/ecb-can-cut-carbon-footprint-by-shedding-bonds-of-biggest-polluters.html "ECB can cut carbon footprint by shedding bonds of biggest polluters") and curbs on the usage of dirtier fuels.

In China, where [factory inflation hit](https://www.financedigest.com/nestle-closes-french-buitoni-factory-hit-by-e-coli-outbreak.html "Nestle closes French Buitoni factory hit by E.coli outbreak") 9.5% in August, power cuts have slashed output of goods from cement to aluminum.

These outages are a risk to end-users such as those in auto supply chains, Morgan Stanley said, noting “cost-push [inflation and tightening upstream supply that could affect downstream production and profits.”](https://www.financedigest.com/inflation-boosts-jeronimo-martins-q4-profit-but-dents-margins.html "Inflation boosts Jeronimo Martins’ Q4 profit but dents margins")

2/ CHIPFLATION

Semiconductors, or chips as they are known, are tiny but are having an outsized impact on global factories. At General Motors alone, chip shortages are seen cutting Q3 vehicle deliveries by 200,000, while [falling output](https://www.financedigest.com/japans-factory-output-posts-biggest-fall-in-8-months-on-weak-autos-chips-sectors.html "Japan’s factory output posts biggest fall in 8 months on weak autos, chips sectors") has sent used-car prices spiraling.

Chip [prices have risen and semiconductor giant Taiwan’s TSMC is mulling further hikes](https://www.financedigest.com/sony-hikes-ps5-price-on-economic-pressures-rising-rates.html "Sony hikes PS5 price on economic pressures, rising rates") of up to 20%. That will ripple across everything from electronics to cars and phones to washing machines. But chipmakers themselves face higher input costs from commodities to power.

It does seem likely that these semiconductor [shortages are going to persist into next year,”](https://www.financedigest.com/eu-could-face-gas-shortage-next-year-iea-warns.html "EU could face gas shortage next year, IEA warns") said Jack Allen-Reynolds, senior European economist at Capital Economics.

Or beyond. [Intel’s CEO predicts chips](https://www.financedigest.com/intel-wants-5-billion-more-in-german-subsidies-for-chip-plant-bloomberg-news.html "Intel wants  billion more in German subsidies for chip plant – Bloomberg News") will comprise a fifth of a car’s cost by 2030, from 4% in 2019 as vehicles become self-driving or electric.

3/ FOODFLATION

Global [food prices](https://www.financedigest.com/world-food-prices-hit-record-high-in-2022.html "World food prices hit record high in 2022") rose 30% year-on-year in August, an index compiled by the UN Food and Agriculture Organisation shows — a sign of broadening price pressures.

While higher agricultural commodity prices are behind the jump, JPMorgan analysts also attribute food [price inflation to pandemic-related pressures](https://www.financedigest.com/oil-prices-dip-on-u-s-crude-reserve-release-inflation-pressure.html "Oil prices dip on U.S. crude reserve release, inflation pressure") such as logistics disruptions and transport costs.

In emerging markets, where [food makes up a large chunk of inflation](https://www.financedigest.com/average-annual-uk-food-bill-set-to-rise-454-pounds-as-inflation-soars.html "Average annual UK food bill set to rise 454 pounds as inflation soars") baskets, there is more pressure to tighten monetary policy. It is less of a problem for developed nations but price rises look inevitable for items such as [soft drinks](https://www.financedigest.com/russias-ochakovo-ups-soft-drink-bottling-capacity-as-western-rivals-leave.html "Russia’s Ochakovo ups soft drink bottling capacity as Western rivals leave") and snacks.

4/GREENFLATION

Stringent rules to guide the transition to a greener future are blamed for stoking ‘greenflation’, for instance by shutting out polluting factories, vehicles, ships and mines, in turn [reducing the supply of key goods and services](https://www.financedigest.com/four-tips-to-help-reduce-employee-ghosting-in-financial-services.html "Four tips to help reduce employee ghosting in financial services").

Prices for European carbon emission allowances, have doubled this year to 65 euros a tonne. A price of 100 euros would lift European retail power prices 12%, adding 35 bps to [headline euro zone inflation](https://www.financedigest.com/boes-mann-falling-headline-inflation-high-core-make-policy-difficult.html "BoE’s Mann: Falling headline inflation, high core, make policy difficult"), Morgan Stanley estimated in June.

There are other examples. Falling [ship orders due to upcoming rule changes on fuels](https://www.financedigest.com/oil-spills-and-near-misses-more-ghost-tankers-ship-sanctioned-fuel.html "Oil spills and near misses: more ghost tankers ship sanctioned fuel") may be a tailwind for shipping rates that have already surged 280% this year.

NatWest attributes the commodity rally at least partly to the shift to greener technologies raising mining and production costs.

All this may not fully have seeped into inflation calculations. For instance, markets see euro area inflation hitting 2% only after a decade, Danske [Bank sees “upside risks to inflation](https://www.financedigest.com/boes-bailey-says-rate-setters-can-put-inflation-before-bank-worries.html "BoE’s Bailey says rate-setters can put inflation before bank worries") expectations…once implementation of the green transition gathers momentum.

5/ WAGEFLATION

As [prices rise](https://www.financedigest.com/renault-revenues-rise-30-in-q1-on-higher-sales-and-prices.html "Renault revenues rise 30% in Q1 on higher sales and prices"), so do expectations of future inflation among consumers, who accordingly demand pay hikes.

The wage growth [picture is mixed](https://www.financedigest.com/dollar-tumbles-as-u-s-nonfarm-payrolls-show-mixed-picture.html "Dollar tumbles as U.S. nonfarm payrolls show mixed picture"). U.S average hourly earnings jumped 0.6% in August and U.S. five-year [inflation expectations are running around](https://www.financedigest.com/no-messing-around-with-red-hot-inflation-five-questions-for-the-ecb.html "No messing around with red-hot inflation: Five questions for the ECB") 3%, surveys show.

In some UK sectors, earnings have risen as much as 30% this year. Euro area labour costs fell in Q2 but [inflation as well as inflation expectations are rising](https://www.financedigest.com/oil-rises-about-2-with-u-s-and-china-inflation-in-focus.html "Oil rises about 2% with U.S. and China inflation in focus").

Maybe markets are a little bit extreme in their pricing, but I’m not recommending [investors should fade that move,” Societe Generale senior rates](https://www.financedigest.com/boe-raises-rates-again-as-investors-look-towards-end-of-hikes.html "BoE raises rates again as investors look towards end of hikes") strategist Jorge Garayo said.

When we go into [next year](https://www.financedigest.com/novartis-to-spin-off-generics-business-sandoz-next-year.html "Novartis to spin off generics business Sandoz next year"), that will be the big test.

(Reporting by Dhara Ranasinghe and Sujata Rao; Additional reporting by Stefano Rebaudo ; Editing by Kirsten Donovan)


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