Economist Argues That Central Banks Must Tame Price Hikes Due To Deglobalization
It is now widely accepted that deglobalization – the retrenchment of global trade, unwinding of capital flows, new barriers to migration, and declining influence of multilateral institutions – is well underway.
Photo Insert: Policymakers have yet to acknowledge its contribution to global inflation.
But policymakers have yet to acknowledge its contribution to global inflation. To rein in surging price growth, the Federal Reserve and other central banks must adjust to the challenges of a rapidly deglobalizing world, economist Dambisa Moyo argued in an article published by Project Syndicate.
Globalization acted as a deflationary force by reducing labor and production costs. Likewise, the main features of deglobalization – higher tariffs and other trade barriers, together with a shift from global to regional trade flows – are known drivers of inflation.
It is no surprise, then, that core goods inflation in the US has increased sharply, from less than 2% at the start of 2021 to 6% in mid-2022.
“I recently argued that US inflation is headed for a decline because the US economy is uniquely equipped to mitigate the impact of surging prices. But deglobalization will likely contribute to inflationary pressures by increasing companies’ operating costs, thereby keeping US inflation higher than the 1-2% range recorded over most of the past decade and hovering near the Fed’s 2% target rate,” Moyo argued.
For decades, US corporations have benefited tremendously from globalization’s deflationary effects. Now, however, ongoing supply-chain constraints related to China’s strict zero-COVID policy and Russia’s war in Ukraine are expected to continue to raise the prices of food, fuel, and manufactured goods over the short and medium term.
More broadly, heightened geopolitical tensions threaten to make higher input costs a fixture of a deglobalizing world. While the cross-border movement of goods, capital, and people characterized the globalized economy of the past three decades, the growing Sino-American rivalry could be a harbinger of an era marked by a widening ideological divide and a balkanized global economy.
Barriers to migration would make it harder for US companies to attract top global talent and drive up labor costs.
As interest rates rise and supply chains remain vulnerable, US companies are favoring resilience over low production costs, leading to massive capital repatriation. According to the Yale School of Management’s tracker, more than 1,000 companies – many of them American – have voluntarily curtailed their Russian operations beyond what international sanctions require.
In a deglobalizing economy, more investment capital would flow back to the US, leading to a higher volume of dollars chasing US assets and putting more upward pressure on prices.