A paradigm shift on inflation

Amid pandemic disruptions, an increasing number of large multinationals are retooling their expansive global supply chains to improve availability and redundancy. The measures include:

• Regionalization: replicate supply chains on a regional level to minimize disruptions
• Nearshoring: distribute manufacturing centers to lower-cost areas near key markets
• Reshoring: bring back manufacturing and supply chains to firms’ primary markets

Given China’s role as an “inflation black hole” in suppressing price pressure, the country’s shifting demographics and multinational’s effort to build a more distributed value chain would likely lead to higher prices. Since it took large conglomerates decades (since China’s entry into WTO in 2001) to reach the status quo of a “hub” paradigm, a departure would likely take years and trillions of reinvestment to complete.

This means more widespread inflation pressure in the years to come, as well as more persistent policy responses to address price pressure.

Asset price implications

If one subscribes to the thesis that low inflation enabled expansionary monetary policy and elevated asset prices, then higher inflation would induce the opposite effect. Broader asset market investors remain sanguine on such risks and expect high inflation to be fleeting. If the higher trend inflation scenario materializes, then it would likely take markets some time to adjust.

Disclaimer: not investment advice.