WHY SUPPLY CHAIN DISRUPTIONS CAUSE INFLATION
Supply Chain Disruptions cause Inflation. Contrary to what some news media report, shortages and disruptions mean fewer items available for purchase , consumers are willing to pay more to obtain the item—as outlined in the economic principle of supply and demand. The result is higher prices due to demand-pull inflation.
Inflation reflects the wide range rise of prices or the fall in the value of money. It generally results from too much demand chasing too few goods or limited services, leading to price increases. Inflated prices don’t necessarily hurt the economy as a whole, and only those consumers making purchases experience the increase. As we all know that was the case during 2020 and 2021 where COVID interrupted many delivery services of many products.In the short term, high inflation can be the result of a hot economy — one in which people have a lot of surplus cash or are accessing a lot of credit and want to spend. If consumers are buying goods and services eagerly enough, businesses may need to raise prices because they lack adequate supply. This was the case in 2020 and 2021.
Causes of inflation:
There are three main causes of inflation: demand-pull inflation, cost-push inflation, and built-in inflation. Demand-pull inflation refers to situations where there are not enough products or services being produced to keep up with demand, causing their prices to increase.
Demand-Pull Effect
It occurs when an increase in the supply of money and credit stimulates overall demand for goods and services in an economy to increase more rapidly than the economy’s production capacity. This increases demand and leads to price rises. Add to that purchasing of goods driven by fear of shortages and lack of products.
Cost-Push Effect
Cost-push inflation is a result of the increase in prices working through the production process inputs. When additions to the supply of money and credit are channeled into a commodity or other asset markets and especially when this is accompanied by a negative economic shock to the supply of key commodities, costs for all kinds of intermediate goods rise. In 2020 and 2021 the cost of the final product increased due to lack of rack material or what we call upstream supply chain disruptions.
Built-in Inflation
Built-in inflation is related to adaptive expectations, the idea that people expect current inflation rates to continue in the future. As the price of goods and services rises, workers and others come to expect that they will continue to rise in the future at a similar rate and demand more costs or wages to maintain their standard of living. Their increased wages result in a higher cost of goods and services.
Understanding Supply Chain disruptions
Before the COVID-19 pandemic, many people did not know what supply chain really meant. Many people didn’t and still don’t fully understand the meaning of logistics. They think of logistics as only shipping. Today, manufacturers, warehouses, transportation providers, distribution centers, and retailers are all topics of mainstream media. Times are changing—so is the supply chain.
” Material shortages overtook COVID-19 as the top supply chain disruption in 2021. 75% of companies experienced external disruptions in 2021, and 56% say that 2021 brought more disruption than 2020. 98% of companies believe measures should be taken to avoid future supply disruptions, but only 63% have done so to date.”What are the major supply chain issues?Top Supply Chain Challenges for Shippers
- Keeping transportation costs down.
- Keeping up with customer/industry demands.
- Sourcing consistent, reliable carrier capacity.
- Keeping up with the latest technology solutions and demands.
- On-time pickup and delivery performance.
Most likely, supply chain disruptions will continue but companies can use the opportunity to redesign processes and update technology to solve long-term issues. Supply chain disruption will continue to affect businesses in 2022 but will also open up opportunities to resolve long-standing weaknesses.
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