Supply Chain Expert Explains Highest Inflation Hike in 40 Years

Bearing out dark forecasts made by economists in the fall, inflation continued to rise in December — making 2021 the steepest inflationary increase the country has seen since 1982.

The Consumer Price Index rose 7 percent from 2020 to 2021 as prices jumped for basic necessities like food, energy and consumer goods including cars, furniture and homes. Businesses have seen little reprieve in supply chain woes that have led to increased costs across economic sectors, economists say.

Economists told Corp! Magazine they expect inflation to continue well into 2022 and perhaps even 2023 as supply chain and labor problems persist, and as demand for goods continues to outpace supply of many products. Ports still struggle to push goods into the country and businesses still are coping with higher transportation costs.

Although not all industries are facing the same level of higher costs borne by most of the economy — beef and energy being two of the most notable examples — most sectors are passing those costs along to consumers because of those costs, said Tomas Hult, a professor at Michigan State University’s Broad College of Business.

To understand what’s happening with inflation in the U.S. right now, Corp! Magazine turned to Hult, an expert in supply chain management and international business:

CORP!: Supply chain, logistics issues and a lack of labor are in part behind rising prices. But is there a way to gauge which of these is perhaps the larger contributor to rising prices of basic necessities like food, rent and perhaps heating costs this winter? What is the biggest driving factor behind rising prices for basic necessities?

Professor Tomas Hult: The biggest driver is supply chain bottlenecks! As a background, despite the wake-up call companies got during the economic downturn in 2008-2009 or the disruptive disasters of, for example, the tsunami in Japan in 2011 or hurricane Katrina affecting the New Orleans port in 2005, companies have been limiting their inventories throughout the supply chain to stay competitive for decades. The bullwhip effect of a disruption at any point in the supply chain on the availability of products to end-customers can be enormous. With the pandemic, we saw significant disruptions at multiple stages in the supply chain and these effects carried over in much more severe product shortages than anticipated because of the compound effect of disruptions at various stages of the chain. This resulted in higher prices for basic necessities.

CORP!: In your opinion, is inflation right now an economic necessity given the unusual pandemic circumstances (shortages in products, labor and supply chain bottlenecks, etc.), or is it to some extent a choice companies are making to seize the chance for higher profits and larger shareholder returns? For example, in the case of energy, I’ve read that oil companies are practicing “capital discipline” to drive higher investor returns rather than ramping up production again, which could have kept costs lower. Put another way, should we think of inflation as inevitable given the circumstances, or should we think of it as being driven by choices companies are making to pass costs to consumers and/or seize the opportunity to ramp up profits?

Hult: This is a tricky question and complex picture in the very competitive marketplace. As a start, customer satisfaction has been dropping during the pandemic while customer loyalty has been staying consistent. That means customers are buying, or at least want to buy, from their regular companies despite the declining satisfaction they get from these companies’ products and services. Given that global supply chains can’t deliver on the expectations of customers at the same rate as before, prices have been raised – which means the value received by customers has been lowered since they’re paying more for the same quality product – and as a result inflation has gone up since customers are willing to spend and have more pent-up demand and money to do so but limited options to spend their money on.

CORP!: The most economically vulnerable will of course be hit hardest by the price increases for basic necessities. Are there winners when it comes to inflation? Beef producers, for example have been doing very well right now, charging quite a bit more despite their business costs not growing very much.

Hult: It is very clear that not all industries and products or services are constrained by inflation or the bottlenecks created by supply chains. But many companies still create more limited offerings, higher prices, and leverage their goodwill among existing customers – the end result being higher profit, limited customer focus, and more ingrained customer loyalty. The beef industry and the oil industry have been taking advantage of the perception of inflation and supply chain constraints and leveraged these marketplace constraints to their advantage.

CORP!: Do you expect inflation to broaden to other sectors, and how long do you think it might persist before beginning to taper off again?

Hult: The omicron variant of COVID-19, as a follow-up to the Delta variant, factors into the ongoing inflation to the extent that the supply chains are not able to jump-start operations at many of the critical nodes in the chain to satisfy the pent-up demand by customers. Customers are going back to normal shopping needs and wants faster than the supply chains and their critical bottlenecks can handle. So, companies and employees are more cautious in going back to full-scale operations because of the financial devastation of COVID-19 and the risk of the Omicron, Delta (and subsequent variants) taking a similar toll on the marketplace again.

CORP!: Is there anything else you think I should have asked about to understand inflation right now, or anything you think people should know when thinking about this issue?

Hult: We have an interesting dynamic at work in the marketplace today. Customer satisfaction is lower than it should be but for a good reason due to the pandemic limitations. Meanwhile, customer loyalty is still rather high, likely as a result of customers’ cumulative experiences with a company and its product prior to the pandemic. For those who are working, salaries are up, the stock market is up, and pent-up demand is high. That means prices can be higher and products that are available will be sold since there will be buyers at higher prices. As a result, we have inflation even though the infrastructure in the marketplace demands financial input to solve global supply chain bottlenecks and worker shortage. Infusing more public resources to solve the infrastructure problem could then result in even greater inflation, while it is clear we need it. Ultimately, that probably means a stock market correction is coming relatively soon, as we can predict by falling customer satisfaction perceptions.