The world’s economy looks set to boom as the US and China lead the world out of recession. As a result, however, many economists are now warning of the threat of inflation, not least due to fiscal stimulus packages and on-going quantitative easing. There is the worry that if governments inject too much money into the economy, inflation will soar and a transient period of strong growth will be followed by higher interest rate-induced recession.
The situation is made more complicated by the cost-push and demand-pull nature of the inflationary pressures. In a blog written for the White House, the authors highlight disruption to the supply chains both in terms of difficulties in sourcing parts (such as the automotive industry is currently experiencing) as well as the impact of ‘lumpy demand’ on container shipping, exacerbated by the breaching of the Evergreen Marine Ever Given in the Suez Canal. These are cost-push pressures.
Demand-pull inflation, on the other hand, will be created by the pent up demand for products and services caused by months of lockdown policies, which have prevented consumers from making purchases, especially of ‘big ticket’ items. Savings rates are at historic highs, meaning that certain parts of society have significant amounts of money to spend and interest rates are negligible. The supply-demand imbalance could cause a surge in prices, at least until more products come to market.
At this stage it is far from clear that the economy will react in this way. People point to the decades of ‘stagflation’ in Japan which any amount of fiscal intervention could not reverse. However, if we assume that ‘vertical’ inflation (as it’s been termed) is indeed on the cards, if only for the short term, what impact would that have for the logistics and supply chain industry?
Firstly, high demand will cause global oil prices to move higher which will have an immediate impact on logistics costs and rates. In sectors where capacity is already under heavy pressure (air and sea, for example) these costs will be passed directly onto customers (and ultimately consumers). In the more fragmented road freight sector, especially in markets still struggling to come out of recession (such as in Europe), carriers will struggle to implement rate increases to cover their increased costs and margins will be squeezed.
Secondly, once renewed economic growth has absorbed unemployed labour, conditions for wage inflation could exist. The warehousing and transport industry are still highly labour intensive, and competition for workers would lead to increasing remuneration. For some sectors, such as last mile delivery, rising wages could either disrupt the business models of on-demand platforms, dependent as they are on the availability of cheap labour, or even suppress demand as consumers migrate back to visiting food outlets/stores in person rather than paying extra for delivery. Increasing costs in the warehouse will either be passed eventually to consumers or boost the drive to robotics and automation.
The ‘hard landing’. Central banks may be tempted, as inflation surpasses their targets, to raise interest rates in an attempt to suppress demand in an over-heating economy. Interest rates have been at very low levels for over a generation and such a course would be a considerable shock to many home-owners and borrowers. This could create a hard landing in terms of consumer spend which in turn would have a big impact on shipping volumes, just at the point, in any case, when post-Covid re-stocking was coming to an end. What’s more, it could occur at a time when additional air and sea capacity is being brought back into the market, leading to plunging rates.
In supply chain terms, increasing interest rates would mean that the cost of owning inventory would increase, creating a push back against more recent attempts to build stock levels back up as a risk mitigation against disruption. Inflation could mean lean inventory strategies come back into fashion – positive for air cargo and express services.
One of the little considered impacts of inflation will be on the balance of the digital and physical worlds. Already COVID has led to a boom in digital services; take video conferencing for example. An inflation-fueled increase in commodity prices, oil being one of the most important, would increase the momentum behind the take up of digital services, further suppressing demand for physical goods. Manufacturers and retailers would be forced to increase their prices, whereas there would not be the same pressure on digital service providers. As one commentator put it, physical will become ‘premium’. If this is the case, then de-materialization will prove to be a headwind to future growth of shipping volumes.
Conclusion
As mentioned, there is no guarantee that economies are strong enough to support inflationary pressures. As the authors of the White House blog write, ‘We think the likeliest outlook over the next several months is for inflation to rise modestly …and to fade back to a lower pace thereafter as actual inflation begins to run more in line with longer-run expectations.’ They believe inflation to be a short term blip, with cost-push and demand-pull pressures transient. However, if the central bankers get it wrong and go on stimulating demand too long, the consequences outlined above could lead to significant disruption for the global logistics and supply chain industry.
