The first step toward understanding “the great supply chain disruption of 2021” is to recognize 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 US 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 should not raise interest rates in the near future — and consumers need not worry that products such as Chinese-made toys will always be so expensive.
To be sure, there have been some specific COVID-19-related supply chain disruptions that have led to narrow inflation. However, for the most part, inflation is being driven by rising energy and transportation costs.
Container shipping rates, for instance, were more than five times higher last month than they were in September last year. Making matters worse, overall congestion rates, especially at US ports, were as high as 80 percent, 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 percent higher than they were in December 2019.
By contrast, retail sales in Europe are up just 4 percent. Likewise, in Antwerp and Rotterdam congestion rates were just more than 20 percent this month.
That difference is reflected in the inflation rate. In the eurozone, prices were up only 3 percent year-on-year last month, compared with 5.4 percent in the US.
Moreover, core inflation — which does not count food and energy prices — was up only 1.6 percent in the eurozone, compared with 4 percent in the US.
What about energy? The US consumer price index for energy was up 24 percent year-on-year last month. The average price of gasoline rose more than US$1 per gallon during the same period.
However, the problem 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 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. However, with little clarity about future demand, drillers have found it difficult to find financing. Only now that oil has passed US$70 per barrel has the rig count turned upward. It would 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 that the US economy received last year and this.
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 labor markets are tightening, they are nothing like the US labor market, where record-high openings might 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 that the US is seeing now is a result of fiscal stimulus, it would begin to fade next year. To the extent that businesses are successful in economizing on labor, the resulting productivity improvements would also reduce inflation pressures. The upshot is that the supply chain situation is likely to be far less dramatic a year from now.
Karl Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also cofounder of the economics blog Modeled Behavior.
This column does not necessarily reflect the opinion ofthe editorial board or Bloomberg LP and its owners.
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