I'm as guilty as anyone for sounding the alarm bells around inflation in recent quarters. After all, inflation has historically almost always ensued after governments decide to run extra shifts of the printing presses (and more recently, as speculators have headed towards commodities rather than other investment options, primarily the result of the rising availability of ETFs). But is there a chance all of this straightforward inflation rhetoric is nonsense? And what are the procurement implications of a very differing state than growth in both commodity markets and the overall economy -- inflation combined with stagnant or down economic growth?
The answer is actually almost scarier than the alternative. Stagflation, such as the state is known, brings with it an entirely different set of challenges than inflation. But are we headed in this direction? Over on Spend Matters affiliate site MetalMiner, Stuart Burns recently took a stab at summarizing some of the recent international thinking around the economic prospects for Stagflation.
Stuart writes "the IMF expects global banks to lose $2.5 trillion by next year. So far they have confessed to $1 trillion. The west is building massive deficits which will have to be paid down one day by higher taxes, lower spending and slower growth -- US (-628bn), Spain (-$109bn), Italy (-$62bn), France (-$58bn), Britain (-$53bn), Greece (-$42bn). America's baby boomers have lost 45 percent of their net worth. US consumer credit has contracted for six months in a row, falling by a record $21.6bn in July. The US savings rate has risen from near zero to around 5%." Moreover, according to one of his sources, "the commodities and stock markets may be sizzling but industrial production is still down 23% in Japan, 17% in the Euro zone, 13% in the US and 11% in Russia. We have a global glut of manufacturing plants. This is why companies will have to slash staff this year and next."
The danger is that we're facing the "potential double whammy of rising inflation as the currency slides, pushing up the cost of imports and sparking commodity rises". Yet "at the same time, the country faces an excess of capacity and lack of demand as consumers remain retrenched rebuilding their personal balance sheets". Is this a recipe for stagflation? You bet. My guess is that if such a scenario unfolds, procurement organizations will need to more carefully than ever balance commodity risk management strategies with the need to minimize inventories if demand truly does decline.
Moreover, I suspect we'll see yet another round of retrenching around global sourcing if the dollar -- and possibly other currencies -- continue to weaken against the RMB. Still, perhaps there could be a silver lining in the US. And that's the fact that our exports would be cheap on the world stage. Still, given that we're currently in the midst of starting a global trade war, perhaps even this bright spot will fade. Just as fast as you can change a Chinese made tire on your car.