KARL W SMITH: Supply chain is overloaded rather than disrupted

The first step towards understanding the Great Supply Chain Disruption of 2021 is to recognise that the phrase itself is not quite accurate. Supply chains are not disrupted so much as overloaded, and the effects are more national than global.

This understanding has implications not only for US consumers but also for the Federal Reserve. It means that inflation is transitory and is unlikely to spread to the rest of the developed world. So the Fed and other banks shouldn’t raise interest rates in the near future, and consumers needn’t worry that products such as Chinese-made toys will always be so expensive.

To be sure, there have been some specific Covid-related supply-chain disruptions that have led to narrow inflation. For the most part, however, inflation is being driven by rising energy and transportation costs.

Container shipping rates, for instance, were more than five times higher in September 2021 than they were in September 2020. Making matters worse, overall congestion rates, especially at US ports, were as high as 80%, meaning there were four times as many ships waiting for a berth as were docked at any one time.

That congestion is primarily a product of dramatically higher volume. US retail sales soared in March and today stand roughly 20% higher than they were in December 2019.

By contrast, retail sales in Europe are up just 4%. Likewise, in Antwerp and Rotterdam congestion rates were just more than 20% in October.

Inflation 

That difference is reflected in the inflation rate. In the eurozone, prices were up only 3% year on year in September, compared with 5.4% in the US. Moreover, core inflation (which doesn’t count food and energy prices) was up only 1.6% in the eurozone, compared with 4% in the US.

What about energy? The US consumer price index for energy was up 24% year on year in September. The average price of petrol rose more than $1 per gallon during the same period.

The problem, however, is not on the supply side; thanks to the shale revolution, the US can produce far more crude oil now than it could in the mid-2010s. The problem is that the US shale oil industry was hit hard both by the collapse in demand due to the pandemic and uncertainty about how long the crisis would last.

Over the past eight months, in fits and starts, demand has picked up. But with little clarity about future demand, drillers have found it difficult to find financing. Only now that oil has passed $70 per barrel has the rig count turned upwards. It will take some time to fully rebuild operations, but the limiting factor was and remains demand uncertainty.

While the spike in energy prices is a global phenomenon, the rise in core prices is unique to the US and driven by the sharp rise in US retail sales. That jump is almost certainly a result of the stimulus the US economy received in 2020 and 2021.

The exceptionally high inflation in the US is a demand-side phenomenon. Nonetheless, it would be a mistake for the Fed to try to bring it back in line with the rest of the developed world.

Crucially, while European labour markets are tightening, they are nothing like the US labour market, where record-high openings may lead to fundamental changes in the ways employers operate. Those changes are a potential source of opportunities for workers and productivity growth throughout the economy.

To the extent the burst in inflation the US is seeing now is a result of fiscal stimulus, it will begin to fade in 2022. To the extent that businesses are successful in economising on labour, the resulting productivity improvements will also reduce inflation pressures. The upshot is that the supply-chain situation is likely to be far less dramatic a year from now

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