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The coronavirus (COVID-19) epidemic is changing supply and demand in the global economy. The shutting down of Chinese factories clearly hits global supply chains. Commodity prices have fallen as Chinese demand has weakened. Paul Donovan, the Chief Economist of UBS Global Wealth Management, analyzes the implications for global inflation.

Key quotes

“Economic theory says that if supply goes down, prices should go up. But firms may choose to keep prices stable. Instead, firms delay sending goods to their customers.”

“China is a more efficient producer of goods. China is a less efficient consumer of commodities. Past outsourcing to China lowered goods inflation but raised commodity inflation. The net effect was to (mildly) raise global inflation.”

“China’s lower commodity demand is likely to be more important than delays in goods supply. If there is any impact at all, the coronavirus should be a very small negative for global inflation rates. However, in advanced economies the most important drive of local consumer prices remains local labor costs.”