Severe Supply Bottlenecks Add to Inflation Pressures
WASHINGTON—Worldwide supply shortages have led to price increases for raw materials in recent months, boosting production costs for many businesses. Due to the “depth and breadth of supply chain disruptions,” economists expect consumer prices to continue to rise for some time.
The supply disruptions caused by the global pandemic and related economic lockdowns stand out for their severity and for their global spread, according to a recent report by the Institute of International Finance (IIF). Supplier delivery delays in the United States and Germany are as severe as Japan experienced in 2011 in the wake of the Fukushima nuclear disaster, the IIF economists said in the report.
The disaster in Japan shook up the supply chains of many global brands, including Apple and General Motors, that relied on Japanese suppliers for many parts.
Similarly, the widespread commodity shortages happening today creep into various parts of the supply chain, raising production costs for many companies such as Procter & Gamble, Kimberly-Clark, and Coca-Cola.
“Firms in many countries [are] moving to mark up their output over input prices to manage demand as economies reopen,” the IIF report said.
Inflation will likely rise further as these higher costs get passed along to consumers, the report said, adding that the Federal Reserve may have to raise its inflation forecasts in its coming meetings “given the depth and breadth of supply chain disruptions.”
The Fed officials have already communicated that they expect upward pressure on prices this year with the reopening of the economy.
In March, the central bank raised its inflation projection to 2.4 percent for 2021, up from the 1.8 percent projected earlier. Fed officials said price increases are “transitory,” with the expectation that inflation will eventually return to the central bank’s 2 percent target.
While most analysts—including the IIF’s—believe that inflationary pressures will be temporary, some prominent economists including Lawrence Summers and Olivier Blanchard have warned that excessive government stimulus could overheat the economy and potentially fuel long-lasting inflation.
Global commodity prices continued to rally last month, marking the seventh consecutive month of rising prices.
Prices are expected to increase 28.5 percent year-on-year in the fourth quarter of this year, according to FocusEconomics, a firm that provides macroeconomic and commodities forecasts.
Increasing activity in major economies and an expected rebound in global travel, along with ongoing vaccination efforts, are expected to increase oil consumption this year, boosting prices further, according to the company’s estimates.
In addition, the company projects prices for copper and steel will continue to rise strongly “as fiscal spending sprees prop up industrial demand amid supply disruptions.”
Agricultural prices are estimated to rise notably this year as well.
The preliminary data on long-term inflation expectations from the University of Michigan’s consumer survey spiked in May, reaching the highest level in a decade.
A closely followed index that shows inflation expectations for the next five years jumped 40 basis points to 3.1 percent from 2.7 percent, marking the largest monthly increase in nearly three decades.
While the data is preliminary and prone to revision, the rise could prove to be more sustainable, according to Matthew Luzzetti, chief U.S. economist at Deutsche Bank.
“If the rise in inflation expectations continues, and a significant overshoot occurs, it could be a key factor in translating an initially transitory rise in inflation into a more sustained increase,” he wrote in a recent report.
The debate about inflation risk began to build after the Biden administration crafted its $1.9 trillion COVID relief package, which was signed into law in March.
With the increased public debate over inflation, “new anticipatory psychology” has emerged, in which inflation expectations have risen sharply ahead of the actual increase in inflation, according to Luzzetti.
“Google searches for inflation recently hit record high levels as concerns become more widespread,” he wrote.
“A rise in concerns about inflation need not lead to higher inflation expectations, but it does raise the possibility that a more persistent rise in inflation becomes the self-fulfilling outcome of an anticipatory rise in inflation expectations.”