The Inflation Wild Card

China’s long-awaited emergence from Covid Zero will push up prices of goods and services

- Enda Curran

The broad view for next year is that inflation around the world will slow as interest rates rise, recession looms and consumers spend less. Cooling commodity, food and energy prices, magnified by the favorable comparison with last year’s steep gains, will combine to slow the broad rate of inflation.

But China’s reopening could rattle those expectations. The scenario goes like this: At some point in 2023, China opens its borders for the first time since the early days of the pandemic. The implications for the rest of the world would be seismic. China’s domestic economy would come back to life. Students would go overseas again, tourists would start to travel, and business executives would get back on planes. This would be happening at the same time China’s housing market starts to recover, further fueling consumer spending.

Bloomberg Economics reckons a China reopening would boost global commodity prices and could create supply chain backups that would put pressure on prices of many goods and services. Assuming China is fully open by mid-2023, Bloomberg Economics estimates energy prices will increase by 20% and the US consumer price index, which they believe may drop to 3.9% by midyear, may jump to 5.7% by yearend.

That would be a reversal of China’s role this year, when it’s helped keep a lid on global inflation. The housing slump and aggressive restrictions to contain Covid have caused an unusual slowdown in China’s economy. Bloomberg Economics has lowered its gross domestic product growth forecast for 2022 to 3%, from 3.5%, and trimmed next year’s projection to 5.1%, from 5.7%. A variety of indicators capture how China’s weakness has affected every corner of the global economy.