Nearly every day, articles are coming across our newsfeeds about the potential for inflation and how we are on the cusp of prices soaring. This anxiety has led to volatility in the stock market and uneasiness from consumers. Is it really inflation or an impact on supply chains due to ongoing struggles from the pandemic conditions?
By no means am I an economist, but I understand the warning signs of inflation. While there are some signs of inflation in the sense of gold and silver prices increasing, those stock prices actually began to rise at the start of the pandemic. This is opinion, but that signals to me that consumers were not losing confidence in paper money because of potential inflation, but due to the overall global environment.
Another aspect of inflation is the rise in commodities, such as lumber prices. As we all have seen, many commodity prices are on the rise right now, which is contributing to increased prices in both the housing market and the manufacturing world. While another sign of inflation, this is where the supply chain struggles of the world and the bull-whip effect need to be analyzed. Back at the beginning of the pandemic, there was so much uncertainty that companies, both manufacturing and housing, ceased operations for the short run until the impacts of the pandemic could be recognized. The result of this was every supplier in those industries having to follow suit in some way due to the decline in demand for their products.
Fast forward to the July-August 2020 timeframe when manufacturers started to restart operations and the housing market began to exceed expectations. Now, whatever demand these companies were getting over the last few months had completely drained most resources with little production to backfill that inventory. Everyone was trying to limit their financial impact of COVID-19 on their business and running with the minimum inventory possible. Something incredible happened at the same time though—consumer demand for goods soared. The automotive industry is an excellent example. There are simply not enough cars right now and consumer demand is far outpacing the current supply situation.
Let’s remember our blog about the bull-whip effect and how small supply changes downstream affect the greater supply chain upstream in larger waves. Suppliers reacted exactly how any rational business owner would to a substantial drop in demand. The trend did not continue however, and the demand came back far sooner than anticipated with suppliers being behind and low on inventory. Suppliers’ costs also began to rise as the cost of transportation has increased. These significantly increased transportation costs cut into the margins of the materials substantially, leaving the suppliers having to pass the costs downstream to the customer. The price increases are also a mechanism to moderate demand. Some customers are going to be willing to pay the additional dollar per pound on a raw material and others will hold off. Manufacturers and builders will pass that cost along to the customer, but in all likelihood, these price hikes are not here to stay, unless the supply shortages continue.
So are the current market conditions resulting from inflation or an impact on supply chains? It’s not entirely clear. Are there signs of inflation? Absolutely, but these signs can be understood and explained from the supply chain struggles that have plagued businesses for the better part of a year. It is important, whether a supply chain professional or consumer, to critically think about how products are being impacted by the supply chain and what impacts are resulting from the tough global environment.