Breakdowns of the multidimensional ınflation crisis

Peak in oil… The price increases and turmoil triggered by Russia's invasion of Ukraine are a harbinger of the fragility of global energy markets. Investing in new oil production now is the clear key to avoiding or at least minimizing the economic, social and geopolitical carnage that has resulted from a longer period of energy chaos and high prices.

The brutal effects of another severe recession or depression will indeed reduce energy demand. But this only slightly delays the inevitable need for more oil production. In fact, even if the world sees oil demand peak in a decade, as the International Energy Agency's latest (and wildly unrealistic) forecast hopes, new production will require much more investment than it currently has.

The chip war… President Joe Biden's recent semiconductor export bans to China have been widely portrayed as America's declaration of economic war with the country. But actually Washington is only reacting to Beijing, and it's a late reaction in that regard.

It is worth remembering that China has indeed paved the way for formal supply chain decoupling with its Made in China 2025 programme. This was announced seven years ago (before the Trump presidency) and openly expressed the country's desire to get rid of western tech—particularly chips—in the next few years. US companies and staff in the chip industry are moving out of China. But many CEOs of American consumer-facing brands are starting to ask policymakers how far the divergence will go, and how fast.

The answer will depend on how permeable the new rules are and how many exemptions are granted. It will also depend on China's next move, which could be to curb some exports of rare earth minerals, of which it controls a large portion. These are used in the defense industry and electric vehicles.

The grain corridor… Russia suspended its participation after an attack on the Black Sea navy, which it blamed on Ukraine, but Turkish President Mr. Tayyip Erdogan said in a speech Monday that his government will continue its efforts to defeat Moscow's opposition.

Then, speaking at a press conference late Monday after meeting with the leaders of Azerbaijan and Armenia in Sochi, Russia, President Vladimir V. Putin reiterated that Russia has suspended its participation in the agreement and that the responsibility for suspending Russia's participation in the agreement rests with Ukraine.

Putin did not exclude that Russia would resume its participation in the grain agreement. “We are not saying that we have stopped our participation in this operation, we are saying that we have paused it,” Putin said at a press conference in Sochi, Russia, after meeting with the leaders of Azerbaijan and Armenia.

Global wheat prices rose around 6% to about $8.80 per bushel before stabilizing on Monday at the start of trade. This is much lower than when the full-scale invasion of Russia began in February, when prices rose above $12 per bushel.

Hard landing and monetary tightening in advanced economies... Non-manufacturing US businesses began to report slower growth as faster inflation, rising interest rates and growing concern about the economic outlook hit household and business spending. The Institute for Supply Management's non-manufacturing index fell to 54.4 in October from 56.7 in September and 66.7 a year ago.

The non-manufacturing index, which covers the services, transportation, construction, mining and farming sectors, fell to its lowest level since May 2020, when the economy was in the first wave of the pandemic. The employment component fell to 49.1, falling below the 50-point threshold that separates expansion from contraction for the third time in five months.

Service sector activity is highly correlated with manufacturing: the correlation between ISM's manufacturing and non-manufacturing indices (both quarterly average) is 0.8. Many services are provided to the manufacturing sector and the supply chain, and both respond to the same macroeconomic fluctuations. Services follow production to a marked slowdown after two years of extraordinarily rapid recovery from the recession caused by the pandemic.

The Fed raised its interbank overnight rate target to 3.75-4% from 0-0.25% at the start of the year, recording the fastest rise in borrowing costs in 40 years. Interest rate traders predict the target will increase further to 5-5.25% by mid-2023 and remain above 4% for the rest of 2023 and 2024 as the central bank tries to drive hyperinflation out of the economy.

The central bank continues to increase interest rates aggressively even as the business cycle rapidly loses momentum, pushing the economy towards a relatively hard landing. However, personal consumption expenditures (PCE) inflation was advancing at over 4% in 3Q22, double the Fed's 2% target, and labor-intensive services inflation at almost 5%. Policymakers openly believe they must risk a hard landing to quickly contain inflation before it gets further into wage and price-setting processes.

Conclusion? Global news is not very positive at the moment. Everything from the chip war to the grain corridor to oil and energy shortages is pushing the cost of living, and therefore inflation, to new heights.

This forces the government to raise interest rates, which in turn causes mortgages, interest payments, etc. It increases the population's cost of living again, as it has an impact on…

Kaynak: Tera Yatırım-Enver Erkan
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