Inflation is the big worry at present. It is the one of the republican’s main talking points ahead of the mid term elections next year. High inflation should not be a surprise to anyone. Afterall, Central Banks have been printing money since Covid 19 started. It was this quick action that resulted in the markets only falling for a month instead of years. But a consequence of this action is lots of money in the economy which was widely predicted to result in inflation if it went on longer than 6 months.
Lockdown saw supply chain issues with factories closed or at reduced capacity. There was lots of empty containers and then ships sitting at ports in a long queue waiting to unload. Don’t forget the Ever Given getting stuck in the Suez Canal for six days in March, freezing $10 billion a day in trade. The Shanghai Containerised Freight Index (SCFI) spot rate on the Shanghai-Europe route was less that $1,000 per TEU (twenty-foot equivalent unit) in June 2020. It jumped to $4,000 per TEU by the end of 2020 and and it is currently $7,549 per TEU.
People have also changed how they spend their money.The demand for semiconductors and raw materials has soared, creating a bottleneck. The production process simply cannot meet the current demand. The worry is that the bottleneck is a glass tomato ketchup bottle. You shake and shake and nothing comes out. Then all of a sudden, it comes flooding out.
You will remember when the pandemic started, everyone was stock piling toilet roll. If people continued to purchase their normal amount, there would have been no shortage. But because of panic buying, it created a shortage and an even higher demand for toilet paper.
This is known as the the “bullwhip” effect. The actions of the retailer travels up the supply chain, creating a bigger demand as it goes. We are now seeing manufacturers hoarding stock in case there are shortages. This in turn creates a higher demand for components and drives up prices.
The big question that is whether this permanent or transitory? Economists and commentators are split on this. What action is required to reduce inflation differs greatly depending on which side you are on.
Those on “team permanent” are calling for an end to quantative easing and an increase in interest rates. This will reduce the amount of money that people have to spend and activity in the economy will be reduced. With less money to spend, activity in the economy be reduced. It will also mean less people employed as demand will be down.
Those on “team transitory” believe that high inflation will pass. If demand remains high, producers will invest in creating greater capacity to meet demand. Increased production will see more employment and more sales. With supply meeting demand, prices will also reduce as a result.
Steven Barrett
06 December 2021