Low inflation is a "pipe dream" amid ongoing deglobalization, warns the CEO of independent financial advisory and asset management organizations.
The comments from Nigel Green of the deVere Group come as major economies release their latest inflation reports.
US inflation rose by 3.1% in January - more than expected due to stubbornly high shelter prices, and UK inflation held steady at 4% year-on-year in January as prices of furniture and household goods, food and non-alcoholic beverages eased.
He comments: "Inflation is clearly on a slow downward trajectory following multi-decade highs that have forced central banks around the world to embark on their most aggressive rate hike programs in generations.
"However, we think it's unrealistic that inflation will fall as low as many expect due to the ongoing deglobalization."
One of the main arguments for the belief in low inflation amid deglobalization revolves around the idea that reshoring and shortening supply chains will lead to increased efficiency, and thus lower production costs.
"While this concept sounds plausible in theory, the reality on the ground tells a different story.
"Consider the increased shipping costs as a result of the ongoing tensions in the Red Sea. This could hamper the global fight against inflation, according to the OECD.
"The Paris-based group estimates that the recent 100% increase in sea freight rates, if sustained, could add nearly 5 percentage points to import price inflation in its 38 member countries.
"The incident highlights the vulnerability of localized supply chains. The disruption causes delays in the transportation of goods, leading to shortages and pushing up prices. If anything, this is a stark reminder that even localized events can have far-reaching effects on global supply chains, contradicting the narrative of efficiencies and lower costs associated with deglobalization."
Similarly, the ongoing semiconductor shortage has shaken industries worldwide, from automotive to consumer electronics.
Far from being an isolated incident, it exemplifies the intricate web of interdependencies that characterize the global economy. "The shortage has led to higher prices for a wide range of goods, again challenging the assumption that deglobalization will automatically lead to cost reductions and, consequently, low inflation.
In addition, the imposition of tariffs and trade barriers as part of deglobalization strategies is putting upward pressure on prices.
"These measures, designed to protect domestic industries, usually result in higher costs for imported goods. The impact of such policies on inflation cannot be underestimated, as consumers end up shouldering the burden of higher prices."
Last month, Tesla CEO Elon Musk called for the U.S. to impose tariffs on Chinese electric vehicles. Chinese car companies are the "most competitive" and "will have great success outside of China, depending on what kind of tariffs or trade barriers are established," Musk said on a post-earnings call with analysts.
"If no trade barriers are put in place, they will pretty much destroy most other car companies in the world," he said.
Nigel Green says: "As long as deglobalization remains a global trend - and indeed it seems to be gaining momentum - low or normalized inflation looks like a pipe dream.
"They need to understand the nuanced but critical impact that deglobalization is having on their well-being."
The views and opinions expressed in this content are those of the author and do not necessarily reflect the views of Korea IT Times.
