- Sohaib, you recently wrote a great report called "Too Much Money, Chasing Too Few Containers," in which you dig into the fragility in the global supply chain. Now, before we get into the details of your report, first tell us, how did we get to this vulnerable state?
- Sure, Anthony. Let's take a step back and look at what happened last year. In the first half of last year, we saw a lot of containers being stranded on American and European shores. In the second half of last year, we saw a lot of demand in the US and Europe for Asian-made goods. Now, this, the combination of these two things, led to a sharp spike in shipping costs.
Now, fast-forward to 2021, we are seeing shipping costs higher than they were last year. We're also seeing a shortage of key manufacturing inputs. And there are several reasons for this. For example, in Japan, we had a fire in one of the major auto chip factories. There's a drought in Taiwan. There was a Suez Canal incident in Egypt. US-China tensions have prompted Chinese manufacturers to stockpile on inputs.
And it's not just the Chinese manufacturers that are doing this. Businesses across the world are trying to stockpile on inputs as much as they can, so as to reduce future setbacks from any such developments. And most importantly, what we're seeing now is a resurgence in demand. And this resurgence in demand will get stronger in the coming months, which will exacerbate the supply chain disruptions.
- And you talk about that surge in demand. One of the questions that's come up is, what does all this mean for inflation?
- Well, a lot of these things have led to inflation being exacerbated. If you look at producer price inflation-- if you look at the latest March data, you see that it went up by 4.2% year on year. This is the highest increase in almost 10 years.
Now, if you look at historical trends of producer price inflation and consumer price inflation, you see that they usually move hand in hand. But in recent months, this relationship, this tight relationship, has weakened. Now, producer price inflation jumped up. And even though consumer price inflation has gone up, it hasn't gone up by the same extent.
In fact, the difference between producer price inflation and consumer price inflation is a staggering 1.6 percentage points. This is the biggest difference since 2004, when producer price inflation data was first published. All of this shows us how much pressure businesses are currently faced with.
- And so what impact could this have on the businesses, as well as their consumers, the customers?
- Well, businesses have a few options. One, they can pass on all or part of the increase in their input costs to consumers. What this would do is this would increase inflation. On the other hand, the trade-off businesses are faced with is that those businesses who push the higher input costs to consumers run the risk of consumers switching demand to other businesses who don't.
But this is very less likely to happen because businesses across the board are faced with higher input costs. So it is very likely that businesses in the coming months and weeks pass on the higher costs to consumers.
The other thing businesses can do is they can absorb the higher input costs. This will lead to lower profits, but at the same time, it will have little to no impact on inflation. The upside of this approach is that businesses will experience stable consumer demand, or even higher demand going forward, depending on how much consumers spend from their excessive savings.
- So do you see these supply chain issues as short term in nature, or do you see these persisting over a much longer period?
- There's no doubt that we will see them persist over a long period. And there are a few reasons for this. If you look at what businesses across the world are doing, they are already shortening their supply chains and bringing them back home. Now, doing this makes sense from the perspective of reducing future vulnerabilities to supply chain disruptions. But at the same time, it will reduce businesses' access to cheaper foreign inputs. It will also lead to higher prices faced by consumers. And it will also make exporters less competitive because they have to now rely more on more expensive domestic inputs rather than cheaper foreign inputs.
- So bottom line, what should investors take away from all of this?
- If there's one thing to remember from all of this, it is that it's not a matter of if, but when prices go up for consumers. So if the price of your daily cup of coffee hasn't gone up yet, don't think it won't be going up in a few months from now.
- Sohaib, thank you very much for your insights.
- Thanks, Anthony.