PERSPECTIVE3-5 min to read

How's vaccine inequality driving up global inflation?

02/11/2021
vaccine-vial

Authors

Tina Fong
Strategist

As the more highly vaccinated countries roll out Covid booster shots, other parts of the world are still struggling to get their first jab. The vaccine divide is more apparent in the emerging markets (EM).

From an economic perspective, by getting a large part of the population vaccinated, countries have been allowed to re-open and this has spurred stronger growth prospects. Instead, economies with low vaccination rates or little natural immunity are often forced to pursue zero-Covid strategies.

The unequal distribution of vaccines is hitting global supply chains and stoking up inflation across the world. As the holiday season approaches, retailers are already warning about shortages and price rises for certain items such as toys.

Why do supply chain disruptions matter to inflation?

With large sections of the world yet to be vaccinated, the Delta variant has led to some countries imposing lockdown restrictions or constraints on mobility. This has caused bottlenecks to global supply chains and shortages. Not having enough workers is often blamed for factory closures or delays in transportation of goods.

As a result, delivery times for goods have become longer and order backlogs have risen worldwide, which can be seen in the Purchasing Managers’ Index (PMI).

20211102_hk_eng_chart_1

With supply deliveries taking longer to meet orders, production and transportation costs are likely to increase. This means suppliers have greater pricing power to pass on price rises to the consumer.

There is generally a good relationship between longer delivery times and global inflation. While higher prices from bottlenecks in the supply-chain are often viewed as temporary, continued supply disruptions from Covid, could mean that the impact on inflation stays for longer.

The vaccine divide between the developed and emerging markets

Some countries in EM have made great progress in rolling out the vaccines, but there remains a stark divide between the developed and EM regions. Despite accounting for half of goods exports to the world, only 28% of the EM population has been double-vaccinated. This compares to around 57% of the population in the advanced economies.1

Among the top exporters of goods in the EM region, both Vietnam and India have less than 20% of the population fully vaccinated with two doses, but India is in a better position than Vietnam for some semblance of normality.

Several devastating waves of the virus has meant that the Indian population has built a higher level of natural immunity. Instead, Vietnam’s low vaccination rate is likely to hamper the country from ending its zero-Covid policy. The latter has proven to be highly disruptive to supply chains.

This has translated into longer delivery times for manufactured goods, such that Vietnam has one of the most extended delivery times in the EM universe. In comparison, more highly vaccinated countries such as China and Malaysia have shorter delays in deliveries.

What are the economic implications?

Getting vaccines to under-vaccinated countries saves lives and reduces the possibility of new Covid variants, but there are also broader economic implications for the rest of the world.

Governments, particularly in the EM, would have greater flexibility to re-open their economies and leave behind their zero-tolerance policies towards Covid. Not only would this boost global economic activity but it would ease the price pressures from supply shortages and disruptions.

That said, the impacts from bottlenecks to the supply-chain are often thought of as temporary. But the longer they persist, the risk is that this feeds into underlying inflation in a meaningful way. This would put more pressure on central banks worldwide to tighten policy sooner rather than later. So, ultimately, it is in everyone’s interest for policymakers to reduce the unequal distribution of vaccines.

1 Calculations based on Our World Data using regions defined by the IMF, 27 September 2021

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Authors

Tina Fong
Strategist

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