Why inflation risks could end up deflationary

Author: Giles Coghlan | Category: News

Via Bloomberg 

The story so far - Inflationary pressures are starting to build. We know that.  PPI metrics in the US and China are starting to show that producers are facing higher prices. Now passing that on to consumers is not always a simple process, but the way of the world is that the more things cost to produce the higher the prices will tend to be. These are certainly inflationary pressures. There is also the new problem of rising wages. Some industries were reporting a difficulty in filling jobs. Harder to fill jobs, means higher wages. Higher wages mean higher costs. Again, inflationary pressures.

The rise in commodities is also an inflationary pressure. Raw materials rising makes products more expensive and that will have inflationary tendenices. Ok, so how can an inflation risk actually be deflationary? Tracy Alloway the Executive editor of Bloomberg makes a good point here.

Bottlenecks 

Via Bloomberg 

Ok, so commodities are rising, so is transport costs, wages could start to rise and supply shortages all push the cost of finished good higher. But, here is the problem. The resultant price rises reduce demand and creates a bottleneck.Therefore, the impact can be deflationary.



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