The Supply Chain There are two broad factors that affect prices – supply and demand. Generally, inflation is caused when there is a change to one of these factors. If the supply of goods is reduced for a given demand, prices (inflation) will increase until a higher price level is reached that balances the demand to match the reduced supply. If the demand for goods is increased for a given supply, prices (inflation) will increase until a higher price level is reached that balances the supply of goods to match the increased demand. So far, we have focused on increased demand as a cause of higher inflation, but what about supply? The pre-COVID supply chain was much different than the supply chain since COVID. The COVID-related supply chain interruptions created significant imbalances in demand and supply. Demand increased, supply fell, and inflation resulted. U.S. manufacturing was hit hard by COVID, and the U.S. auto industry was perhaps the primary example of supply chain issues leading to inflation. Since the 1980s many U.S. firms turned to just-in-time inventory management, which focused on minimizing inventory levels and costs by receiving inputs just-in-time for the manufacturing process. That works if the supply chain works, but supply chain interruptions create product shortages and resulting inflation. Semiconductors are needed to manufacture cars. World-wide demand for semiconductors grew significantly in 2020 and 2021, as sales of consumer electronics ramped up and new technologies developed in the auto industry. However, the bulk of semiconductors are produced in Asia, including Taiwan, South Korea, China, and Vietnam. The impact of COVID on the supply chain contributed to a semiconductor shortage in 2021, particularly in the automotive industry. According to the Semiconductor Industry Association, the U.S. share of global semiconductor manufacturing capacity declined from 37% in 1990 to just 12% today. The drop in U.S. global semiconductor manufacturing capacity exacerbated COVID related sourcing problems. The shortage of semiconductors contributed to new car prices increasing 12.5% for the 12-months ended March 2022. And if consumers can’t afford or find the new car they want, demand for used cars goes up. For the 12-months ended March 2022, used car prices increased a whopping 35.3%. Energy Prices The table below shows the surge in energy prices for the 12-months ended March 2022. The overall March inflation rate of 8.5% was led by an overall increase in energy prices of 32%, with gas prices soaring 48%. According to the Bureau of Labor Statistics, the rise in gas prices accounted for almost a third of February’s increase in inflation and approximately half of March’s inflation. And that impact is understated, since rising gas prices affect shipping costs which in turn affect product costs.
12-Month Percentage Change in Prices for Period Ended March 2022 (Source: Bureau of Labor Statistics)
Energy
32.0 48.3 48.0 70.1 13.5 11.1 21.6
Energy commodities Gasoline (all types)
Fuel Oil
Energy Services
Electricity
Utility (piped) gas service
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Center for Business and Economic Insight
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