Inflation and the supply chain


For lack of a nail, the shoe was lost.

For lack of iron, the horse was lost.

In the absence of a horse, the rider was lost.

For lack of a rider, the battle was lost.

In the absence of a battle, the kingdom was lost,

And all this for lack of a horseshoe nail.

  • Benjamin Franklin, America’s leading supply chain expert

When Ben Franklin shared this proverb in his 1757 almanac, he gave us a clear example of the kind of disruption producers and consumers face in the global economy in 2021.

Inflation is usually caused when too much money is put into circulation by a central bank (like our Federal Reserve Bank) to pay off public debt or simply to stimulate economic activity. This can overheat an otherwise well-balanced economy. (See our Intel Market on June 24.)

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Today we face a different kind of inflation (September’s consumer price index was up 5.4% from a year ago), with specific disruptions cascading across the board. the economy, leading to general shortages and price increases. This is similar in many ways to inflation in wartime, when governments take dramatic measures that skew the economy to cope with the crisis, the shape of demand suddenly changes and certain flows of production and exchanges are interrupted.

Government action and the economy

In most countries, the government has responded to the pandemic by forcing or encouraging the closure of offices, shops and other places of business. Even after the reopening, public health rules and guidelines encouraged many people to stay home for work and play.

Massive government spending in many countries, including the United States, has provided continued purchasing power to many unemployed people; this kept aggregate demand for goods and services on the rise, even though their production was slowed by the lockdown.

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Finally, the planned rules obliging companies with more than 100 employees to require vaccination or tests will have some impact on the availability of labor in an already tight labor market. More immediately, the announced policies requiring federal employees to be vaccinated by Nov. 8 as a condition of employment could leave the USDA and other agencies short of filing cabinets, inspectors, and other personnel needed to. ensure the circulation of food and other products in the market.

Demand

Lockdowns around the world in 2020 have caused many people to shift their spending from services to goods. In the food business, that meant fewer meals out and more meals at home. For many people, it also meant spending less on outdoor entertainment (ball games, shows, concerts) and spending more on things (electronics, furniture, kitchenware, home exercise equipment), much of it purchased. online and largely imported. It left restaurants, stores, and physical outlets empty, even as it strained the ability of the global economy to manufacture and ship the products people bought online.

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A missing horseshoe nail: breakdown of “just in time”

The scorching economy of 2019 was a finely tuned machine. Manufacturers, farmers, restaurants and retailers relied on what they needed to be delivered “just in time”. They got exactly what they needed, just when they needed it; this reduced their inventory costs and made the economical machine as efficient as possible.

The lockdown economy of 2020 began with consumer panic buying milk, toilet paper and other basic goods. The changes in demand discussed above have created imbalances in the economy, leaving companies with the wrong mix of inventory to meet the new demands. The refined machine tilted.

There weren’t enough container ships or port capacity to carry everything we wanted from Asia. At the time of this writing, 77 container ships were waiting at anchor for a berth to unload in the ports of Los Angeles and Long Beach; this number is normally zero. Rail freight was short and increasingly expensive. There weren’t enough computer chip factories to supply the electronic brains of everything from computers to cars. To add to the difficulties, an ice storm in Texas and a power outage in February, as well as Hurricane Ida in August, crippled parts of the national oil / natural gas / plastic industry, leaving the country short. many key industrial ingredients.

The same logistics experts who had pushed “just-in-time” inventory management started telling producers around the world that they should stock up “just in case” instead; that they should be more resistant. This commercial version of buying excess milk and toilet paper became good advice for individual businesses this year, but it had a similar effect to panic buying at the grocery store: some things got expensive or hard to find.

And yet, there is not a great urgency to invest in new capacity for some of these bottleneck products and services. Some of these companies are taking advantage of the high prices of their scarcity. Some may view their customers’ excessive “just in case” orders as part of a normal inventory cycle, in which orders will decrease once their customers become comfortable with their inventory size. Why build capacity if this is a temporary rush? What makes this unusual is that the new uncertainty in the supply chain has reset every industry’s inventory cycle at the same time, with implications for the overall economy.

How it all comes together

Pandemic inflation is therefore not a question of too much money for the same quantity of goods. These are COVID’s reshaping of the details of supply and demand, selected shortages resulting from these changes and these shortages cascading impacts on the many supply chains that make up our productive economy:

Due to the lack of a computer chip, the car was not assembled. For lack of wood, the house was not built. Due to the lack of a sea container, the television did not arrive. Due to the lack of natural gas, the fertilizer was not produced; for lack of fertilizer, the harvest was stunted. And all of this for lack of a few key parts of the supply chain, the price of almost everything has gone up.

The COVID pandemic has presented us with price increases throughout the economy because COVID has tipped the finely balanced economy of 2019 into the lockdown economy of 2020 and the chaotic recovery of 2021. It will take time and costs. investments (and labor, one story for another day) to strengthen the ability to further refine our supply chains. In the meantime, we may have to wait for this new truck and pay more for it when we arrive.

About Nicole Harmon

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