Note: The wage measures in Panel A are: the median change in hourly wages of individuals observed 12 months apart in the United States;
contractual cash earnings in establishments with five or more employees in Japan; and negotiated wages excluding one-off payments in Germany.
2015 2016 2017 2018 2019 2020 2021
% of firms A. Job openings in US small businesses
with few or no qualified applicants
0
2015 2016 2017 2018 2019 2020 2021
Industry
Services
%
B. Share of EU firms reporting production constraints from labour shortages
Figure 1.11. Inflation expectations have moved up, but expected wage growth is little changed
Note: In Panel B, ‘Selected other OECD countries’ corresponds to a weighted average of other OECD countries for which comparable wage expectations data are available: Australia, Canada, New Zealand, Norway, Sweden and the United Kingdom. Countries are weighted by employment levels. The value for 2021Q4 is based on the October value for the United States, and is available only for New Zealand, Norway and the United Kingdom for the aggregate.
Source: Refinitiv; Chartered Institute of Personnel and Development; Bank of Canada; and OECD calculations.
StatLink 2 https://stat.link/tlis8n
COVID-19 related and other supply disruptions have helped to push up commodity prices over the past year during a time when demand for these commodities, albeit rising rapidly, was still lower in volume terms than before the pandemic. Oil prices more than doubled between June 2020 and late November 2021, a period during which global production was consistently below 2019 levels. Similar patterns were seen for coal, some metals, and a range of agricultural and industrial commodities. Gas prices and electricity costs have also soared. The spike in energy prices in recent months, resulting from a complex mix of causes (Box 1.2), is directly felt by households, helping to explain why their expectations of near-term inflation have risen strongly in many countries.
Box 1.2. The recent rise in energy prices – drivers and implications
Prices of all major energy commodities have risen sharply since mid-2020
The recovery of energy prices over the past 18 months – after some future prices for oil and natural gas had turned negative in the first wave of the pandemic – has been spectacular. Spot prices for Brent crude have doubled since end-June 2020, while the increases for coal and natural gas have been much larger still, by around 8 times and 18 times respectively at their peaks in early October, with some retracement since then (Figure 1.12, Panel A). Most of the increase has occurred since the early part of this year.
The common factors in the surge in the prices of different energy commodities are restricted supply and the resurgence of demand as economies progressively reopened (Fernández Alvarez and Molnar, 2021).
Beyond those basic shared features, however, there have been a range of specificities for the different commodities and particular markets.
The number of active oil rigs globally has risen by about half since falling to a record low in mid-2020, following the sharp decline in oil prices, but it remains well below the levels prevailing just before the onset of the pandemic. The OPEC+ agreement in April 2020 initially reduced global oil output by around 10%, with a partial unwinding of the production cuts thereafter. This was accelerated via subsequent agreements in 2021 as oil demand recovered. Global supply this year has also been restrained by such events as the Texas freeze in February and Hurricane Ida in August. More recently, oil prices have surged to their highest level since late 2014, in part because of additional demand for power generation.
Figure 1.12. Fossil fuel prices have surged, pushing up electricity generation costs
Note: In Panel A, monthly averages from daily prices (November is based on data up to 24 November). Coal price is Australian steam coal average FOB Newcastle (spot price reported by HWWI); gas is Title Transfer Facility Netherlands daily futures price; oil is Brent crude spot price. Panel B shows the contributions from changes in commodity prices and changes in carbon permit prices to changes in the cost of electricity generation using gas and coal respectively in the European Union between June 2020 and October 2021.
Source: Refinitiv; US Energy Information Administration (EIA); and OECD calculations.
StatLink 2 https://stat.link/5nfbj4
In response to the drop in global demand and low prices, global coal production fell by 5% in 2020, its largest decline since the Second World War. The recovery in supply as demand rebounded was held back by a number of factors including pandemic-control measures (China), floods (Australia and Indonesia) and rail disruption (South Africa).
Significant imbalances between demand and supply have emerged in gas markets, and put significant pressure on international gas prices, even though global demand has returned only recently to pre-pandemic levels. Chinese demand for liquefied natural gas (LNG) has remained unusually high since the winter of 2020, causing some gas that would otherwise have gone to Europe to be diverted. Low water levels and hydroelectric power generation in South America in early 2021 further boosted international LNG demand. The European winter was also colder than normal, spurring greater demand for gas and causing an unusually large draw-down of stocks that have not been restored fully this year.
Restocking of reserves in Russia has been a factor in limiting supplies to Europe as demand has turned up this year. European demand for gas in the summer of 2021 was also pushed up by low production of wind power, with wind speeds across the continent unusually low.
In jurisdictions where carbon permit prices have also increased (especially Europe, including the United Kingdom, which now has its own permit system), this has contributed modestly to rising energy prices.
The EU carbon permit price roughly tripled from its level just before the pandemic struck to its level in mid-October 2021, though this accounts for only a small part of the total increase in the cost of electricity generation using gas or coal (Figure 1.12, Panel B; see also Pacce et al., 2021).
0
A. Prices of oil, natural gas and coal
0
B. Contributions to the increase in electricity generation costs since June 2020
Rising energy costs have hurt households’ purchasing power and fed the rise in inflation expectations
The direct impact of higher prices for oil, natural gas and coal on household expenditures has so far been limited given that spending on electricity and fuels is in the range of 5-10% in most OECD economies and that not all of the increases in spot prices have yet fed through into retail prices. Transaction prices, especially for natural gas, are much less volatile than the spot price, as a large share of gas is shipped on the basis of long-term contracts. In addition, a large share of retail prices reflects costs not related to commodity prices, such as the cost of labour in transportation and indirect taxes. Thus, for example, while the price of crude oil in the United States more than doubled over the year to mid-October 2021, retail gasoline prices increased by only about 50% during the same period. Finally, in some countries, governments have intervened to hold down the prices faced by households. About one third of OECD countries have taken action to cushion the rise in electricity prices, through a mixture of price caps, tax reductions and support for lower-income households (Boone and Elgouacem, 2021).
Even if, overall, the impact of the increase in energy prices on household budgets so far has been limited, that is not necessarily the case for all households. Lower-income households tend to spend a higher share of their income on energy (Figure 1.24), and they are less able to cushion the effect of a jump in energy costs by drawing on savings or reducing other expenditures, as they also spend proportionately more on other necessities.
The contribution to consumer price inflation from energy prices should peak soon
If the price increases for oil and natural gas since mid-2020 are not unwound, further rises in prices for electricity, gas, heating oil and motor fuels can be expected as higher commodity prices become reflected in long-term contracts and regulated price ceilings are raised. In addition, the rise in energy prices has raised costs for businesses already, particularly for industries such as chemicals and metals, and may continue to be passed on into output prices. Even so, however, without further rises in commodity prices, the biggest hit to household budgets will have occurred by the end of the winter of 2021. Further near-term fuel price rises are possible, given relatively low inventory levels, but a likelier outcome is that the supply constraints that have held output below pre-pandemic levels are unwound. In time, demand will also adjust to pricing anomalies that have emerged; for example, at its peak in October 2021 the oil-equivalent price of natural gas in Europe was around USD 200 per barrel, incentivising the use of other fuels. Apart from substitution between gas, oil and coal, the price spikes that have occurred could also help to spur faster development of alternatives to fossil fuels.
Headline inflation and, to a lesser extent, core consumer price inflation have risen markedly in most countries over the past year (Figure 1.13). Among large advanced economies, this is particularly the case for the United States, as well as, to a lesser extent, the United Kingdom, Germany and Canada. Commodity prices have risen particularly sharply, as have prices in many durable goods sectors, especially in the United States, where the switch in consumer demand from services to durable goods was particularly marked (see below). There was much less of a surge in durables demand in the euro area, for example, and price spikes for durable goods were accordingly much more muted. Core inflation (excluding food and energy) in the median advanced economy remains close to or below central bank targets, at 2.2% in October. Base effects are also affecting fluctuations in annual inflation. Some prices fell in most countries in the early phase of the pandemic, creating a low base for year-on-year increases in 2021. In many economies, inflation when smoothed over a two-year period, to control for the pandemic and the rebound, has been similar to the preceding two years, although the United States is a notable exception. Finally, large pandemic-induced changes in consumption patterns and relative prices have created some challenges to the measurement of inflation (Box 1.3).
Financial conditions have generally remained very favourable worldwide in recent months, and have tended to evolve in a similar manner in large advanced economies. In contrast, developments have been more diverse in emerging-market economies. The signal by the US Federal Reserve in September that the tapering of asset purchases could begin imminently prompted repricing, with US nominal bond yields
rising for some weeks. Still, 10-year government bond yields in late-November were little changed from May in the United States,2 the euro area, Japan and the United Kingdom, which suggests that longer-term inflation expectations have remained anchored despite rising inflation. In contrast, 10-year yields were over 1 percentage point higher than in May in some large emerging-market economies, including Brazil, Turkey and Russia (Figure 1.14). In the euro area, spreads relative to Germany have remained broadly stable. In most economies, both advanced and emerging-market, equity prices generally remain higher than earlier this year. Most large advanced economies’ currencies have depreciated against the dollar since May, while the picture is mixed for the major emerging-market economies.