Jeran Van Alfen, CFP®
It Costs How Much? Understanding Supply-Chain Issues
Updated: Oct 10, 2021
In many of the conversations that I’ve had recently, inflation has been a subject of concern. Things are just costing more. Energy prices are where we are really feeling it, but food and shopping prices are up as well. There is a good explanation for this, which I will touch on below.
No one wants to pay more money for anything. However, it sometimes helps to put things into perspective and gain understanding in order to plan ahead and make the best choices with your money.
The chart below shows inflation measures going back 50 years. As you can see, the headline consumer price index has a 50-year average of 3.9%. The August 2021 CPI came in at 5.2%. So, right now, we are well above the average rate of inflation. However, we can also see in this chart that the CPI has been well below the long-term average since 1991 (minus a few spikes in 2004 and 2008). While inflation has spiked this year, we really haven’t dealt with significant inflation for quite a while, and the recent averages remain low. The question remains, where does it go from here?
If we consider the factors below that are driving inflation higher, we can understand that the current inflation spike should be temporary and inflation growth rates should return to the 2% normal that we have been accustomed to over recent years.
Source: JP Morgan Asset Management; GTM U.S. 09 30 2021
Pandemic ripple effect
Many of us would like to move on from the pandemic. Earlier this year, as the U.S. reopened, vaccines were rolled out, restrictions began to be lifted, and we all got excited about a return to normal. However, the return to normal hasn’t been all that smooth and we are still dealing with some ripple effects from the economic shutdown. The rise of the Delta variant this summer prolonged some of the effects of Covid on our economy and pushed back some of the expectations for full recovery.
A global chain
While much of our focus tends to be on our own economy, we have to be conscious that we are dependent on other countries as well. Even if our government takes a certain action and our country is reopening, other countries may not be in sync.
A good example is South Korea. Many of our goods are shipped from South Korea. While our economy remained open, South Korea partially shut down in July. This few weeks of shut down created delays in shipping that are still present.
The cost to transport anything has shot up over the last year. As companies evaluate how much it costs to ship goods or import supplies, they are seeing a huge spike in expenses. This rise in costs is passed on through higher prices in clothing, electronics, machinery, etc.
Products aren’t moving
In addition to shipping prices, there are labor shortages that are affecting the timing of shipping. Our ports, trucking and rail labor is understaffed. From ships unable to port to trucks moving without being filled, there are some broken chinks that need to be fixed.
On average a gallon of gas cost $3.22 in the U.S. this week, which is the most expensive since October 2014. In Europe, energy prices are even worse. Much of this is due to OPEC+ deciding not to increase production.
What is the fix?
While it is a natural instinct to look for blame, there is really not a lot that anyone can do to implement a quick fix. These issues are the result of economic shutdowns in many countries starting in 2020 and persisting until now. There is not one person, administration, or agency that we can point a finger at because the issues run through the entire supply chain. The pandemic has put a magnifying glass perspective on some of the dependency that has developed over many years and has created a need to re-think how we work together to get things done.
The good news!
We seem to be in a situation where we have to wait for supply to catch up. That being said, here are some things that signal that the problem is working itself out.
1. Covid cases are on their way down after spiking this summer
2. The U.S. services sector showed gains in September for its 16th straight month of growth. This indicates that we are willing to get out and spend money. This also is a good indicator that we want to spend our money on services more than goods which will lessen the demand/supply imbalance and brings some relief to prices.
3. U.S. households in general, are doing really well right now. Consider the slide below that shows the average household balance sheet. We can see that net worth is up and debt servicing is way down. This is a good indicator that the consumer is healthy and will likely keep our economy growing through some of these short-term problems.
Source: JP Morgan Asset Management; GTM U.S. 09 30 2021
While inflation has been more persistent than we might have expected earlier in the year. We still feel that the spike in prices we are seeing now is a temporary result of the pandemic. Supply-chain problems will have a negative effect on corporate earnings and profits over the next few quarters, but we should still expect some modest growth. The bottom line is that we may have to be patient, let these problems work themselves out and stay focused on the opportunity for the services sector to fully recover in the near future.
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