Global inflation, Russia-Ukraine war aren't going away soon: Nomura’s Richard Koo

According to Richard Koo, the transition to clean energy had already started the inflationary trend long before the Russia-Ukraine standoff. (Photo by Karolina Grabowska/Pexels)

There has been a lot of discussion around inflation being temporary since this is a supply-side one. But Nomura Research Institute’s chief economist Richard Koo says inflation is being fed from the supply side, demand side and through energy-market transformation. Therefore, it is likely to be around for long.

Clean fuel

According to Koo, the transition to clean energy had started the inflationary trend long before the Russia-Ukraine standoff. Climate-change concerns began to play out in the middle of 2021.

It resulted in three changes. One, companies realised that the landscape was changing and decided to invest much less in fossil-fuel production. “As a result, supply of fossil energy has been slow in responding to recovery in demand,” said Koo.

Therefore, the chance of prices staying elevated to recover costs and make profits before the 2030 deadline, when emissions have to be reduced by 45 percent, is higher.

Also read: India's inflation to surprise on the upside, RBI to be behind the curve says Nomura

It can even cause a slowdown in globalisation since tariffs may be imposed on countries that aren’t enthusiastic about clean energy.

“Companies may then not be able to do much production abroad, and may have to contain it within their country,” he said.

Companies will also need to invest in replacing equipment that runs on oil, gas or coal. All this is going to be a long process, so “we are facing a very long-term inflationary trend from this switch”, he said.

Higher demand 

According to Koo, many US retailers chose not to restock inventories during the pandemic because they didn’t know when consumers would return.

Their inventory-to-sales ratio dropped sharply–from 1.7 months to less than a month, and then recovered slightly to less than 1.2 months but that too is low.

The pandemic also caused suppliers to send fewer products. Now, the retailers are issuing orders to make up for the empty shelves and that is driving up inflation.

The economic recovery of countries that contained Covid-19— like developed nations that have given their citizens three jabs— and retailers stocking up more to protect from further supply disruptions were also raising prices, according to Koo.

Also read: Russia, US recession, rate hikes key worries for market: Ridham Desai

Supply fed

With the pandemic disrupting the supply chain unevenly, production is getting held up waiting for all the components to arrive.

“All outsourced products need to arrive to finish the product,” he said. Supply has been less than usual, he said.

Koo expects a prolonged Russia-Ukraine war. “My concern is that this conflict will go on for quite a while, for many many months, maybe even longer,” he said.

Russia would be able to prolong the war because the country’s President Vladimir Putin enjoyed substantial support at home because of his past policies, he said. With his economic reforms, Putin managed to increase the country’s per capita GDP by 12x, Koo said.

The West wasn’t likely to back down because it was determined not to appease any dictator, a lesson it took from the 1938 Munich Agreement between Germany (under Adolf Hitler) and the UK (led by Neville Chamberlain). Though he had agreed not to make any territorial aggression after the agreement, Hitler invaded Poland and set off World War II.

“For the first time since 1990, since the Cold War ended, the West is willing to sacrifice economic wellbeing to defend a political ideology,” he said.