While the situation in the UK may look grave, the most likely location of a stagflationary event is actually advanced emerging economies in Asia and beyond, according to Societe Generale’s Michala Marcussen.
Marcussen notes that the inflation problem in that region is much more severe, with the potential for it to feed on itself and become a much bigger problem. That’s because in these economies, the government will be forced to raise wages to keep up with rising food and energy costs. This is already happening in China. Any increase in wages is likely to feed inflation further, going forward.
This, coupled with economies that may already be near full employment, means these countries may already be at their peaks. And yet, their central banks aren’t tightening.
Here’s why, from Marcussen:
Policymakers are concerned, however, that hiking interest rates may attract more potentially disruptive capital inflows and fast track exchange rate appreciation, risking an abrupt loss of competitiveness. Capital controls have become popular as the new policy tool to address this dilemma. Our concern is that the tool may prove blunt, and that inflationary spirals will ultimately trigger abrupt economic slowdowns in the emerging economies.
So while all eyes may be on the developing weakness in the UK, that story may be nothing compared to the what’s happening in India, China, and other emerging economies.