Russian Gas Cutoff Symbolizes New Era of Supply Shocks and Inflation

War, sanctions, export controls and natural disasters all threaten commodity supply chains, challenging central banks’ inflation goals

By Greg Ip. Excerpts:

"When shifting demand and supply fundamentals drive up a price, markets eventually fix the problem. The World Bank noted, in a report released this week, that higher oil prices in the 1970s brought forth new supply from Alaska’s Prudhoe Bay and the North Sea. In response to high food prices, Argentina and Brazil went from producing virtually no soybeans to 17% and 50%, respectively, of the world’s output, it said. Conservation trims demand, such as through higher fuel standards and lower thermostat settings. And technology devises alternatives.

But governments today are often doing the opposite, according to the World Bank. Their “policies so far have taken the form of tax cuts and fuel subsidies, especially for gasoline…Such measures actually increase demand and put further upward pressure on the prices of crude oil and other petroleum products.”

The World Bank, in a 2019 report, noted that governments also ban exports when prices are high and encourage exports when prices are low, amplifying price swings in both directions. In 2010-11, such policies contributed to a jump in wheat and maize prices that tipped 8.3 million people into poverty, it estimates.

China is doing something similar now, according to a new report by Chad Bown and Yilin Wang of the Peterson Institute for International Economics. They say China has restricted exports of fertilizer and steel, driving up prices for consumers in other countries. It has also lowered then raised pork tariffs in response to domestic conditions, whipsawing global markets. “The trouble with China is that it continues to act like a small country,” they wrote. “Its policies can be beggar-thy-neighbor,” solving “a domestic problem by passing along its cost to people elsewhere.”"