Jean-Claude Trichet: Globalisation, inflation and the ECB monetary
policy
Lecture by Mr Jean-Claude Trichet, President of the European Central Bank, at the
Barcelona Graduate School of Economics, Barcelona, 14 February 2008.
* * *
Introduction
I would like to start by thanking Banco de Sabadell for hosting this event and thanking the
CREA and the Barcelona Graduate School of Economics for offering me the opportunity to
hold this lecture. It is a privilege for me to be here today, at this School which represents a
prominent example of how Europe can successfully benefit from globalisation, and become a
powerhouse of knowledge production and dissemination. Today, I would like to discuss the
consequences for the euro area prices brought about by the forces of globalisation, and their
implications for monetary policy. As an open-minded practitioner in front of so many
distinguished academics, I am looking forward to learning a lot from your comments and
questions.
Globalisation is certainly one of the most analysed and discussed economic phenomenon of
our time. The notion of "globalisation" subsumes the concepts of cross-border market
integration, country and policy interdependence, and fundamental historical change.
Economists classically think of globalisation as a process of market integration that leads to
price convergence across markets for goods, labour and services worldwide as well as to
growing trade and financial flows.
Outside economists' circles, however, globalisation refers to a more general phenomenon of
growing interdependence between countries including also technological, environmental or
social aspects. It encompasses many multifaceted phenomena, from the diffusion of
knowledge and cultural patterns, to the unprecedented speed and freedom of communication
and travel in the age of the Internet and jet.
Knowledge and ideas travel much faster than physical goods and people, a key distinctive
aspect of the current wave of globalization compared to previous episodes. A striking aspect
is the emergence of what has been called "self-organizing collaborative communities," like
those that have produced Linux and Wikipedia. Academic economists know a lot about this,
as they have been part of a similar community for long time, comprising the research
universities of the US and Europe.1
The current phase of economic globalisation has also coincided with the reintegration into
global markets of China, India and the former Soviet bloc, transpiring into the doubling of the
effective global labour force from about 1.5 to 3 billion. For this reason, the current debate
about globalisation is very often indistinguishable from the debate about the advent of
emerging economies and their systemic implications.
Globalisation brings together in public debate a broad set of policy issues, such as trade
liberalisation and competition from low-wage economies; foreign direct investment and
offshoring; international capital flows; immigration and pressures on labour markets in mature
economies; the implications of the global spread of technology, as reflected in discussions
about intellectual property rights, for instance; or the protection and promotion of cultural
diversity. On the one hand, globalisation is celebrated by its supporters because of the
higher quality of life it brings about, with very similar words as those Keynes used almost a
century ago to describe the heydays of the "liberal international economic order" before
World War I.2 On the other hand, the sweeping and relentless demise of physical and
manmade barriers to the mobility of goods and services, ideas and people, is criticised because it
supposedly also does away with necessary protections for disadvantaged workers and
households in poor and rich countries, the environment and cultural diversity.
All these developments have put globalisation at the centre of international policy debates.
The European Union considers globalisation to be "one of the major challenges" it is
confronted with and defines the phenomenon as "the increasing interdependence of the
global economy and ever-growing competition on international markets."3
The increasing interdependence of the global economy is also of paramount importance for
central banks as it possibly affects, among others, the formation of international good prices,
the inflation process, the valuation of assets, the cross-border constellation of capital flows,
and international financial stability.
I will touch upon some of the consequences of globalisation forces for price stability, and the
implications and challenges for monetary policy. Monetary effects of globalisation were
already a topical issue in 16th century Spain, during the establishment of global colonial
empires, when large influx of silver from the Americas led to unprecedented increases in
prices first in Spain but then also in the rest of Europe, accompanied by substantial external
imbalances. Then as now the debate was whether inflationary pressures were just about
relative prices or should also have implications for the price level. This incident of an early
phase of globalisation was associated with the blossoming of key contributions to economics
such as the quantity theory invented by the School of Salamanca, but also, quite alarmingly,
the rise of protectionist mercantilism. Catalonia was indeed an early victim of protectionism,
as only in 1778 it was allowed to trade with the Americas by decree of Charles III.4
Setting the stage: globalisation and the euro area
As globalisation means different things to different people, there are also many popular
measures of globalization. For example, the 2005 issue of Foreign Policy magazine ranked
countries in terms of their degree of globalisation based on a variety of criteria, including
international travel and tourism, membership in international organizations, contributions to
United Nations peacekeeping missions, international telephone traffic, Internet hosts and so
on. The three most globalised countries turned out to be Singapore, Ireland and Switzerland;
2
"What an extraordinary episode in the economic progress of man that age was which came to an end in
August, 1914! [...] The inhabitant of London could order by telephone, sipping his morning tea in bed, the
various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early
delivery upon his door-step; he could at the same moment and by the same means adventure his wealth in
the natural resources and new enterprises of any quarter of the world, and share, without exertion or even
trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes
with the good faith of the townspeople of any substantial municipality in any continent that fancy or information
might recommend. [...] But, most important of all, he regarded this state of affairs as normal, certain, and
permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous,
and avoidable." John Maynard Keynes, The Economic Consequences of the Peace, New York: Harcourt,
Brace and Howe, 1920, pp. 10 -12; quoted by M. Wynne (2005), "Globalization and monetary policy,"
Southwest Economy , Federal Reserve Bank of Dallas, Issue 4, pp. 1-8.
3
See Berlin declaration of 25 March 2007.
4
Papademos, L. (2007), "The effects of globalisation on inflation, liquidity and monetary policy", speech
delivered at the NBER conference on "International dimensions of monetary policy," Girona, 11 June 2007.
BIS Review 21/2008
the United States was fourth. When one looks at measures focusing more narrowly on
economic globalisation, however, the striking and not widely known fact is that Europe, and
the euro area in particular, turn out to be more closely integrated with the global economy
than the US.
Globalisation, if narrowly defined as growing trade openness in response to declining trade
and transport barriers, has been ongoing for decades and in this sense is not a novel
phenomenon. Over the last decade, however, this process appears to have accelerated, and
the increasing trade integration has been accompanied by signs of a rapidly growing
interdependence of economies also via production and financial market linkages, with two
broad factors underlying such a development. First, falling costs of moving not only goods,
but also services and information across borders, have led to changes in the production
processes, most notably related to the international fragmentation of production (Chart 1).
Second, there has been a large expansion in global productive capacity on account of the
opening up of emerging economies to international trade and production.
Against this backdrop, euro area external trade as well as flows and stocks of foreign assets
and liabilities have been growing strongly. This has been partly as a result of the increasing
role of New EU Member States as trade partners, as well as rapidly increasing imports from
Asia (especially China). Thus the trade openness of the euro area has increased rather
markedly through time, especially since the early 1990s, and is growing more rapidly than in
either the USA or Japan. In particular, trade volumes have also expanded strongly for the
euro area (from 33 % of GDP over the period 1997-2000 to 38 % of GDP over the period
2001-2006 ; over the same periods, figures for the US stand at 24 % and 25 % and figures
for Japan stand at 21 % and 23 %), with export and import volumes continually and rapidly
outpacing the growth rate of GDP over the past quarter of a century (Chart 2a and 2b).
Meanwhile, over the past decade world cross-border capital flows have also been growing
strongly, increasing many-fold (from 4 % of aggregate GDP in 1994 to more than 14% in
2005 for the OECD countries) as a percentage of GDP (Chart 3a). A similar story holds for
the euro area (Chart 3b), where the ongoing strength of capital flows is reflected in the
considerable increase in outward and inward FDI virtually doubling (from 20% of GDP to 35
% of GDP as regards outward investments and from 15 % to 30 % of GDP as regards inward
investments) as a percentage of GDP since 1999 (although cross-border bank lending has
also significantly increased in recent years). Strikingly, while euro area external assets and
liabilities at the end of 2006 amounted to 148.4% and 160.5% of GDP, respectively, the
same ratios in the US were smaller, at 104.2% and 123.5% of GDP.
Globalisation and price developments
Economic theory predicts that this ongoing process of crumbling of national economic
borders, and the associated increase in international flows of capital, goods and services,
should have resulted into greater pressure towards price equalization and convergence, for
assets, commodities and factors. Given the different speed at which national borders have
shrunk, one would expect a greater degree of convergence for asset prices than for goods
and factor prices.
The available evidence seems to support this contention. While there is ample evidence that
assets with similar risk characteristics yield very similarly returns in international financial
markets, prices of similar goods and services are still quite different across countries. For
instance, many observers have pointed out that long-term real interest rates in the major
currencies have converged to very similar (low) levels, particularly since 2000. Moreover,
there has been a large increase in cross-country correlations of these rates, suggesting that
these dynamics are driven by a global factor which is quite independent from local
developments in real economic growth.6
Likewise, a simple way to gauge the lack of overall price convergence is to look at the World
Bank's latest PPP calculations, according to which prices in China and India in 2004 were
still on average roughly 1⁄2 and 1/9 of their dollar counterpart in the United States.7
However, a remarkable development associated with globalisation has been that, despite the
limited convergence in price levels, inflation developments have seemingly reflected the
influence of global factors.8
This influence might be due to possible structural effects of globalisation on factors affecting
global trend inflation; but also cyclical effects of globalisation forces - such as the soaring oil
price from 1999-2007 - may provide part of the explanation.
You won't be surprise to hear from a central banker that inflation is ultimately, always and
everywhere a monetary phenomenon and, as such, determined by monetary policy. Indeed,
the influential observers who have connected the current period of lower and more stable
inflation across the world with the workings of globalisation have done so by carefully linking
it to either its influence on the incentives to engineer an inflationary bias;9 or the emergence
of an international consensus on putting price stability centrepiece as the overriding goal of
independent central banks.10
Nevertheless, the forces of globalisation may have indeed affected cyclical inflation
developments through the following two channels. First, the influence of foreign conditions in
the price and wage formation process may have increased because of heightened
international competitive pressures, possibly decoupling inflation and standard domestic
measures of macroeconomic slack.11 Second, to the extent that the process of globalisation
has resulted in a number of terms of trade shocks - attenuated increases in prices of
imported manufactured goods and accentuated increases in commodity and food prices -
these may have in turn worked their way into short-run fluctuations in headline inflation.12
While there is a widespread presumption that through the latter channel globalisation forces
have exerted cyclical downward pressures on inflation, it is clear that potentially favourable
"tail-winds" are increasing turning into contrarian "head-winds", posing potentially serious
challenges to the maintenance of price stability. This would especially be the case were they
to spill over into inflation expectations by the public, leading to their unanchoring.
6
See, e.g., Reichlin, L. (2006), Panel remarks at Conference "Financial Markets and the Real Economy in a
Low Interest Rate Environment," Monetary and Economic Studies, 24 (S-1), Institute for Monetary and
Economic Studies, Bank of Japan, pp. 247-52.
7
See World Bank, http://devdata.worldbank.org/wdi2006/contents/Table4_14.htm.
8
Ciccarelli, M. and B. Mojon (2005), "Global inflation," ECB Working Paper No. 537.
9
Rogoff, K. (2003), "Globalization and Global Disinflation," Economic Review, 4th Quarter, Federal Reserve
Bank of Kansas City, pp. 45-78.
10
Goodfriend, M. (2007), "How the World Achieved Consensus on Monetary Policy," Journal of Economic
Perspective, Volume 21, Number 4 (Fall), pp. 47-68.
11
Chen N., J. Imbs, and A. Scott (2007), "The Dynamics of Trade and Competition," Paper presented at ECB
conference "Globalisation and the macroeconomy", July.
12
Rogoff, K. (2006), "Impact of Globalization on Monetary Policy," in Federal Reserve Bank of Kansas City, The
New Economic Geography: Effects and Policy Implications, pp. 265-305..
BIS Review 21/2008
The cyclical impact of globalisation on euro area prices and wages
Here, I will discuss the impact of globalisation on manufacturing and commodity prices and
ultimately consumer price inflation in the euro area, arguing that there is evidence of only a
small overall net dampening effect in last 5-10 years, reflecting the balance of opposite
relative price shocks.13
Import prices
As I argued before, intra-euro area imports have been growing strongly, but euro area
imports from low-cost countries such as China and the new EU Member States (henceforth
NMS) have been growing even more rapidly.
Based on highly detailed data disaggregated both by sectors and countries over the period
1995-2004, Chart 4a shows that the level of import prices (proxied by absolute unit value
indices) from China and the NMS are estimated to be approximately one-quarter the import
price of total euro area import prices, and about one-fifth the price of imports from high-cost
countries.14 Since the start of the 2000s, the share of low-cost countries in extra-euro area
manufacturing imports has increased from just over one-third to almost a half (Chart 4b).15
Rising imports from low-cost countries are putting downward pressure on extra-euro area
manufacturing import prices. Overall, it is estimated that the increase in import penetration
from low-cost countries over this period may have dampened euro area import price inflation
by an average of 2.1 percentage points each year, an effect almost equally accounted for by
China and the NMS.16 The overall impact could be decomposed into two components (Table
1): the first is the "share effect", which captures the downward impact on import prices of the
rising import share of low-cost countries combined with the relatively lower price level of
lowcost import suppliers (1.6 percentage points per year); and the second due to differentials in
the growth of import prices (the "price effect"), which captures the impact of lower import
price inflation from the low-cost countries relative to the high-cost ones over the sample
period (0.5 percentage points per year).17
So far, I have only referred to the downward impact of low-cost countries on manufacturing
import prices. However, there have also been globalisation-related effects on euro area
import prices working in the opposite direction as the strong growth in the non-OECD
economies in recent years seems to partly explain the significant rise in the prices of oil and
non-energy commodities since 1999.18 Overall, Chart 5 shows how globalisation forces have
helped to keep extra euro area manufacturing import prices fairly flat since the start of the
2000s, while the rising price of oil and other commodities (particularly metals and foods) are
reflected in the stronger growth of total extra euro area import prices over the same period.
13
See for further details ECB (2008), "Globalisation, trade and the euro area macroeconomy," Monthly Bulletin,
January.
14
This calculation is subject to caveats, notably that the accuracy of the results may be affected by the fact that
unit value indices do not control for changes in quality.
15
Among the low-cost countries, China and the New EU Member States (NMS) were the main contributors to
this increase with their shares roughly doubling since the mid-1990s to stand at around 12% and 14%
respectively in 2004.
16
See ECB (2008).
17
This methodology follows the methodology in Kamin, S., Marazzi, M. and Schindler, J. (2004), "Is China
exporting deflation", Board of Governors of the Federal Reserve System International Finance Discussion
Papers, No 791 (April).
18
See, e.g. Pain N, I Koske and M Sollie (2006), "Globalisation and inflation in the OECD economies," OECD
Economics Department Working Paper No. 52. They calculate that if the GDP of the non-OECD countries
during the period 2000- 2005 had grown at the slower pace of the OECD countries then the world real oil price
would have been up to 40% lower by the end of 2005.
BIS Review 21/2008
Wages
Turning briefly to recent euro area wage developments, globalisation may have been one
contributing factor to an extended period of wage moderation within the euro area (for
instance, through offshoring or the threat of offshoring), across both manufacturing and
service sector. While productivity growth in the euro area has also been moderate over the
last decade, real wage growth has also been low. Over 1985-1995 both productivity (output
per person) and real wage growth rates averaged around 1.9%. Over the period 1996-2006,
average productivity growth was approximately 1%, with average real wage growth around
0.4%.
While such a development might be taken to be related to a necessary moderation in a
period of persistent high level of unemployment and to an additional moderation driven by
globalisation, extreme caution should be made in drawing such conclusions as regards
globalisation, given several caveats related to measurement issues and the fact that much of
the associated decline in the wage share took place well before the recent phase of
globalisation.19 An increase in the real wage elasticity of labour demand appears to have
occurred in the last years, particularly for low-skilled workers, which may signal a trend
fostered by additional supply of low-skilled labour at a global level.20 Moreover, in addition to
observable factors, an unobservable "threat effect" - whereby workers in industrialised
economies perceive themselves to have a weaker position and thereby moderate wage
claims given a fear of production relocation to lower-cost economies- may have contributed
to wage moderation.
But in the euro area it appears that wage moderation since the setting up of the euro has
been a very powerful response to the level of mass unemployment that characterized Europe
in the 90's. The wage moderation has been at the root of the remarkable employment
success of the euro area with 15 million new net jobs created in nine years, 2 million more
than in the U.S. during the same period.
Overall impact on producer and consumer prices
The recent euro area experience thus indicates that relative price impacts have been strong
over the last decade, with disinflation in manufactured goods contrasting with a strong
acceleration in prices for commodities, though a complete assessment of their importance
relative to historical norms is hampered by limited past data. As shown in Chart 6a, producer
price inflation has shown strong relative price effects, with muted development in consumer
goods excluding food and tobacco (-1.0 % on average over the period 1996-2006 compared
with the overall index) along with capital goods (-1.3 % on average) relative to average
producer prices contrasting with a relatively strong rise (+2.5 % on average) in the energy
component (which also may have also affected prices further down the production chain). As
shown in Chart 6b, HICP subcomponents have also exhibited sizeable price differentials, in
particular with three energy-related items displaying the highest increases over 1996-2006
(between +5.5 % and +7.5 %), while three ICT-intensive internationally traded goods exhibit
the lowest increases (between -5 % and -14 %) over the period.
Overall, numerous estimates suggest a small net dampening impact of globalisation on euro
area inflation of 0-0.3 percentage point per annum over the last 5-10 years when taking into
account the net impact of disinflationary effects of increased trade openness in the
manufacturing sector and strong commodity price increases. On the basis of several
accounting methodologies, including aggregate and sectoral analysis, ECB research finds a
direct dampening effect of import openness on euro area producer price inflation of 0.1-1.0
percentage point per annum for the manufacturing sector over the period 1996 to 2004.21
Likewise, aggregate data shows a dampening impact on euro area consumer price inflation
of 0.05-0.2 percentage point per year on average.22
The outlook: upside risks to inflation related to globalisation
Overall, while the empirical evidence would lend support to the idea of a favorable relative
price shock associated with globalisation, there have been recently signals that the
disinflationary impact of low-cost countries on euro area import prices might be coming to an
end due to increasing inflationary pressures in those countries. At face value, the recent
increases in the prices of import from low-cost countries might be interpreted as a sign that
the downward impact from these countries is waning. Moreover, from a forward looking
perspective, price pressures on soft commodities (such as food) induced by globalisation
forces - following pressures already witnessed on hard commodities - appear to be a
potential source of strong adverse relative price shocks. These developments clearly
represent upside risks to price stability.
A first, distinct threat to price stability associated with globalisation comes from the fact that
global food prices have risen significantly in 2007.23 This is the result of a number of factors,
such as increases in energy and fertiliser prices, adverse weather conditions in some
regions, greater demand for foodstuff resulting from the changes in food consumption
patterns in many developing economies, and from the emergence of new sources of demand
for some agricultural commodities, for example for the production of biofuels. As these latter
developments are of a structural nature, they are likely to have a more persistent upward
impact on global food prices in the future.
The rise in global food prices has led to notable increases in food prices in the euro area, at
both the producer and the consumer level. The producer prices of food products and
beverages rose by 8.6% in annual terms in December, compared with a rate of 2.2% on
average in 2006. At the consumer level, the annual rate of change in HICP processed food
excluding tobacco rose to 5.6% in December, up from 1.6% in 2006.
Further ahead, the outlook for both world and domestic food prices remains uncertain.
Although the supply of agricultural products should eventually respond to the increase in
demand, the catch-up period may be more prolonged than currently envisaged. Moreover,
food price developments depend on a number of factors which are difficult to predict,
including technology advances and possible changes in energy policy. Hence, risks in the
medium term seem to be on the upside.
Against the background of a marked increase in international food commodity prices, I will
remind that further liberalisation and reforms in the EU agricultural markets are particularly
important. Reforms would help to enhance market efficiency and benefit European
consumers in the form of lower prices. In order to allow consumers to profit from lower
farmgate prices, adequate competition in the downstream sectors (food processing, retail trade
and catering) and compliance with Single Market provisions are necessary. The successful
conclusion of the Doha round of world trade negotiations should also help to improve the
functioning of global trade in general, and of agricultural markets in Europe and worldwide in
particular.
Turning to risks of inflationary pressures from emerging economies, currently, some limited
inflationary pressures appear to be originating from NMS (Chart 7). These recent import price
increases primarily reflect the lagged impact of higher energy and raw materials prices which
have pushed up the prices of virtually all euro area import suppliers.
However, while the share of the NMS economies in euro area imports is rather significant, at
around 11%, the relatively limited increases in their export prices - actual and expected - are
unlikely to make them a significant source of imported inflation in the euro area.
Turning to China and India, a noteworthy feature of both countries is the significant upturn in
inflationary pressures recently. In China, food prices have been by far the main contributor to
this recent rise in CPI inflation, whereas non-food prices have remained remarkably stable.
On the one hand, an upside risk is that, admittedly, higher domestic inflation could feed into
wages and, eventually, export prices. On the other hand, ongoing and expected
developments in domestic prices and costs in the NMS as well as in China and India suggest
that potential risks to inflation originating from these two regions are relatively contained.24
Nevertheless, economic development, robust wage increases and terms of trade
deterioration in low-cost countries, as well as increasing sophistication, variety and
technological content of exports would suggest that low-cost countries are making a leap-up
in the value chain and that their export bundles are becoming increasingly similar to the more
advanced western economies, which will ultimately lead in the long-run to a convergence of
their export prices to higher international levels.
Monetary policy implications of terms of trade shocks
To what extent are these developments relevant for the conduct of monetary policy in the
euro area? The European Central Bank's mandate is to maintain price stability over the
medium term, and price stability is defined as a rate of increase in the Harmonised Index of
Consumer Prices for the euro area below and close to 2 percent. Hence, developments in
external prices are relevant for the monetary policy of the ECB to the extent that they have
an influence on medium term deviations from price stability.
What are the potential risks to price stability in the medium term coming from globalisation?
Before addressing these issues and drawing some lessons for monetary policy on the basis
of the euro area experience, let me first reiterate that reports of the death of the effectiveness
of monetary policy in a more globalised world, have been greatly exaggerated. Contrary to
16th century Europe, individual central banks are able, given flexible exchange rates, to
define their medium and long run definition of price stability.25 Moreover, as far as usual
arbitrage considerations still apply, long-term interest rate determination continues to be
closely related to the present discounted value of future expected short-term rates, thus
giving a prominent role to central bank credibility and communication.26
Given that inflation is ultimately a monetary phenomenon even in a globalised world, theories
asserting that China is exporting deflation or inflation should be viewed as overly simplistic.
Globalisation forces materialise as external shocks, which should in principle affect relative
prices, rather than the overall inflation rate in the long run. However, as is often the case in
economics, matters become particularly complex when we move to analyse higher
frequencies. In the medium run, whether terms-of-trade developments - like increases in oil
and commodity prices or cheaper imports - exert positive or negative pressure on inflation
will depend on their net effect on aggregate demand and aggregate supply. Soaring import
prices will in fact tend to produce two competing effects.
The first effect, which can be denoted as supply effect, derives from the lower potential
output growth associated with an adverse terms-of-trade shock, for instance brought about
by an exogenous increase in the prices of oil or other commodities which are used as
intermediate input in domestic production.27 Thus, for a given level of aggregate demand, the
fall in potential output will tend to be such that actual output exceeds potential, leading to a
positive output gap and upward pressure on inflation.
There is a widespread perception that commodity prices affect inflation also through demand
effects. By impinging on individuals' wealth, due to the impact of higher relative prices on
current and expected future income, commodity price shocks may trigger a reduction in the
demand for goods and services. For given potential output growth, the wealth effect would
give rise to excess aggregate supply, thereby leading to downward pressure on domestic
inflation.
Whether inflation tends to increase or fall in response to an adverse terms-of-trade shock will
therefore depend on which of these two effects dominates. In theory, there is no general
result. The net effect will also depend on specific features of the shock, e.g. whether it
reflects exogenous shifts in the commodities supply or a buoyant global demand for them,
and of its transmission throughout the economy. The wealth effect will dominate when
aggregate demand reacts quickly. This may be the case, for example, when relative price
developments are perceived to be very persistent, or permanent. Conversely, supply effects
will tend to dominate when aggregate demand adjusts more slowly. The wealth effect should
also be small, thus contributing to building inflationary pressures,28
Another important distinction, particularly in the present juncture, concerns the ultimate
causes of terms of trade shocks, as they can reflect either commodity-specific or more
aggregate factors. For instance, from the point of view of large economies like the euro area
or the United States, an oil price increase fuelled by Chinese demand is not the same as one
fuelled by a supply disruption. The factors underlying increases in Chinese demand for oil
can also affect global inflationary pressures in a way that oil supply disruptions need not, for
instance if they stem from favorable supply