CPI Could See Upward Pressure In Coming Months

ING thinks the semiconductor shortage is likely to result in chip inflation in the month's ahead:

• "We may begin to see price increases in many parts and goods such as home appliances, cars, and computers, given the continuing global chip shortage. Even bags that do not have a chip in them, use chips in the process of production. This chip inflation may be passed on to consumers and result in a faster CPI growth rate if the chip shortage persists (estimates range from 2022 to 2023).
• We believe that the chip price increase has already pushed up prices of fridges, washing machines, TVs, laptops and car prices in April, which increased 0.6%-1.0%MoM.
• I expect that some goods which contain many chips can be charged at higher prices, e.g. goods related to video games. Demand for such goods does not easily fade even if prices increase.
• If producers believe that spending power is not going to catch up with the increase in chip prices then producers will produce goods with fewer chips and perhaps fewer advanced functions, e.g. in automobiles. But some producers will absorb some of the increase in chip prices and suffer a squeeze on margins and profits.
• There was a long holiday in May in China. Spending and domestic tourism activity were reported to have surpassed pre-pandemic levels. We expect higher CPI inflation in the coming months. On PPI, we expect the market's self-fulfilling behaviour, i.e. buying now rather than later to avoid higher expected future commodity prices will continue, possibly until the Chinese government sends more warning signals to halt raw material price increase."