How do deglobalization and energy transition affect Inflation?

By:Mohamed Ben Abderrazek

Inflation has become a primary concern in the modern economic and financial landscape, and two major trends appear to be contributing to its transformation: deglobalization and the energy transition.

Although both of these phenomena are driven by laudable objectives, their effects on production costs, resource prices and market dynamics have the potential to generate variation in inflation.

Rising production costs

Deglobalization, characterized by a decrease in international trade and a relocation of production, can, despite its advantages in terms of national economic resilience, generate higher production costs for many companies. The loss of advantages connected to inexpensive labour, especially in China and affordable raw materials abroad may push these companies to pass on these supplementary costs in the prices of their final products.

Indeed, China shows a strong desire to empower itself in different sectors, such as the economy, technology and production. This approach is part of its strategy of transition towards an economy concentrated on innovation, high technology and the creation of added value while aiming to strengthen its technological sovereignty, repatriate certain stages of national production, and promote a greener economy.

This quest for autonomy echoes China’s long-term vision to strengthen its influence on the global stage, while potentially having significant implications on global economic and trade dynamics.


Pressure on resources and scarcity of skills

The energy transition necessitates substantial investments in environmentally friendly technologies and infrastructure. While this approach promises a greener future, it may also entail heightened costs for businesses and consumers. Furthermore, the surging demand for specific resources, such as rare metals crucial for electric vehicle battery production, could exert pressure on supply chains, potentially reshaping price dynamics for these raw materials.

Moreover, the energy transition demands specialized technical expertise for the design, production, and maintenance of these new green technologies. In the event of a skills shortage, salaries within these sectors might experience fluctuations, subsequently affecting wage structures across other segments of the economy. These shifts in labour costs can, in turn, manifest as alterations in the prices of various products and services.


Deglobalization or “reglobalization”?

Although deglobalization and the energy transition seek to achieve important goals, they are not exempt from effects on the factors of production. Altered production costs, tensions over resources, scarcity of skills, interventions by public authorities and the growing demand for environmentally friendly products are all elements that can contribute to a new model of pricing. It is crucial to take these dynamics into account when examining the evolution of inflation in the current economic context.

However, it is essential to note that some specialists believe that we are witnessing “re-globalization” rather than de-globalization, as international trade continues to increase, albeit more slowly. Deglobalization is a complex and multifactorial process, and it is important to consider various perspectives to understand its impact on the global economy.

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