BKEX Institute Annual Strategy Report(2022–2023)In 2022, the world experienced an epidemic, war, and sanctions against China and Russia from Europe and the U.S. Many factors have pushed up commodity prices, especially energy. Epidemics and wars have also impacted supply chains, leading to imbalances in supply and demand. On top of that, global central banks release massive amounts of liquidity to rescue the economy during the epidemic. This has shown that the composition of this inflation problem is relatively complex.
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As far as the data is concerned, inflation is concentrated in the two main categories of food (10.9%) and energy (17.6%), as well as the breakdown of automobiles (8.4%) and transportation services (15.2%). It can be seen that rising commodity and energy prices are the leading cause of inflation problems.
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Inflation in food comes mainly from poultry, eggs, cereals, and cereal products. Poultry and eggs are mainly due to the more serious avian influenza outbreaks in producing countries this year, resulting in lower production. The avian flu is still severe, and output has not recovered. Russia and Ukraine make and export wheat in cereal, accounting for 20% and 28% of the world’s production, respectively. There are no signs of the conflict cooling down. Therefore, it should be difficult for this part of inflation to fall quickly. But there is relative optimism: the prices of alternatives such as pork, beef, and dairy products have already declined in the October data. And inflation on food is not a significant problem as long as it remains stable and does not increase significantly.
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The primary sources of energy inflation are gasoline (17.5%), fuel oil (68.5%), electricity (14.1%), and natural gas (20%). Of these, fuel oil rose 68.5%. However, there is a clear seasonality in demand for fuel. After the end of the heating season in January next year, it will naturally decline significantly.
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Also, combine this with the sharp decline in U.S. oil reserves when oil prices were high this year. Events such as the bizarre bombing of the Nord Stream pipeline during the Russia-Ukraine conflict and the massive U.S. exports of high-priced natural gas to Europe make it easy to conclude that energy prices have been under control.
On top of that, we can see that commodity and energy price indices are already falling. This part of the decline is not reflected in the last CPI data for October, which is the consumer side of the price response, while the PPI is the production side, which can be interpreted as a leading index. Therefore, we can remain optimistic about future inflation data.
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