The Major Contributors
What is causing the persistent acceleration in the rate of price increase each month? The BLS data indicate that much of this rising inflation stems from the energy and transportation sectors.
The U.S. Energy Information Administration reports that crude oil prices today are 80% higher than this month last year, despite an 8% increase in global oil production during this time. As crude oil contributes over half of the final cost of gasoline and diesel fuel, it is not surprising that the prices of both fuels rose by more than a third since the beginning of this year.
Further, this same BLS report reveals that the year-over-year increase in the price for used cars today is well over 30%, largely due to a lack of new cars on the market. Many analysts are predicting that the computer chip shortage causing American auto manufacturers to shutter their production lines and lay off workers will not be resolved for another year—or two.
The Crux of the Problem
Why are oil prices increasing when global oil production is rising? Why are foreign computer chip makers not rebounding as their emerging Asian markets start to recover from the pandemic?
The answer is that a lack of healthy workers in developing countries is strangling global supply chain logistics. We simply can’t get the available resources from our overseas trading partners.
This is a significant problem because America has become increasingly dependent on global suppliers of raw materials and production inputs to fuel our economy. Indeed, the US Commerce Secretary recently testified to Congress that the US has outsourced 100% of all complex computer chip manufacturing capacity. Yes, we are completely dependent on foreign production of these essential computing components that are needed in nearly all our consumer goods.
Additionally, the OECD reports that over 90% of the world’s trade goods are transported by sea. This is problematic, as the Wall Street Journal reports, because the costs of shipping a 40 foot shipping container from Asia to the US has increased by over 400% in just the last year.
Why? A veritable logjam of empty container ships is parked just offshore from most of the Asian ports, revealing how these developing countries—upon which the American economy is so dependent—are still unable to provide their own labor force with adequate quantities of effective COVID vaccines. For instance, quarantine restrictions at the Yantian port, one of the biggest in China, caused a 70% reduction in manpower, shuttering their vital operations for months.
These supply chain logistical problems bode ill for a fast-recovering American economy. IHS Markit reports that the global index for manufacturing input prices increased by 60% since the spring of last year. A Reuters news report reveals how increases in American employee wages and raw materials prices have caused many large US corporations to increase their retail prices.
The Inevitability of Inflation
So will inflation be transitory, like the Fed has continually predicted, even as late as last month?
On the one hand, demand-pull inflation describes the American economy as it initially started to recover after the federal government dispensed its COVID checks and enhanced unemployment payouts starting in mid-2020. The resulting boost in the aggregate demand for goods can cause temporary price inflation if the economy enjoys some slack in its supply of labor and resources. Prices would soon stabilize when producers tap into an under-utilized labor force and an excess of raw materials to quickly ramp up production to address any shortages in the supply of goods.
On the other hand, our economy is incredibly dependent on a floundering global supply chain. In mid-2021, the US economy more closely resembles a cost-push inflation scenario where producers have inadequate access to the extra workers and raw materials needed to increase aggregate supply and sustain an economic recovery. The size of America’s labor force has failed to recover to its pre-COVID levels. The needed quantities of raw materials and input factors from foreign suppliers remains underproduced or locked up in global transit. This indicates a more long-lasting setting of persistent price inflation, as American firms can only raise prices in the face of their dwindling inventories.
That economic scenario indicates that price inflation in the American economy will likely hang around for the long run, like so many unwanted houseguests. Plan accordingly.