For a few months in spring last year, toilet paper became a Soviet-style, deficit staple. Supermarket shelves were emptied, prices went up and hoarding set in, exacerbating both deficits and hoarding in a self-feeding loop until we had to realise that the pandemic did neither close supermarkets, nor did it boost our storage capacities at home or our digestive systems. Today, 18 months later, entire economies go the way of the loo roll.
Prices for pretty much everything go through the roof and ever more items are in deficit. Manufacturers cannot keep up production as supplies dry up, or costs go haywire and consumers face shortages unheard of in peace time: McDonald’s is running out of milk, KFC is failing to source chicken, and sparkling water in UK supermarkets became rarer than premium Chablis. The tangle of interrupted supply chains during the pandemic is such that carmakers, failing to source microchips, have to throttle production, ports are congested, containers and truck drivers are scarce, and producers are outbidding each other for materials, fuel and labour to meet reawakened demand.
Purchasing factory managers and reactivated consumers experience rampant inflation across the board. While still many people are out of work, it is already difficult to hire. Open job positions cannot be filled, despite ever more generous wage promises. Pigs are enjoying a new lease of life as slaughter houses cannot be manned. Sport shoemakers are hampered by a lack of labour in South East Asia. The fear of COVID as well as real infection rates keep too many people out of work, exacerbated by seemingly too generous fiscal transfers. The world is increasingly looking like the oil-embargo-induced stagflation of the 1970s, when high inflation was accompanied my slow growth and high unemployment.
The loo-roll mindset meanwhile has reached every corner of the production chain. Over-ordering and excessive warehousing is exacerbating the supply crunch. Some labour shortages are self-inflicted, while others are caused by the pandemic. Transport is a case in point. People employed in shipping were incarcerated on their vessels without leave, some for 18 months and more and are therefore difficult to mobilise now. Off the coast of our Greek summer island, multiple cargo ships were idling on anchor, empty, despite the tripling of freight rates. Hapless ship owners just couldn’t man them. The closure of national boarders and the shutdown of traffic during the pandemic have hampered the free movement of labour across countries. Many migrant labourers went home for good.
Over-ordering and excessive warehousing is exacerbating the supply crunch.- Andreas Weitzer
The UK, home to the chicken, milk and fizzy water deficits, has artificially created a transport problem of its own. Lacking an estimated 100,000 HGV drivers, it is nevertheless refusing to issue visas to EU truckers. Twenty-five thoiusand of them went home after Brexit while the import of transport services rather than drivers is illegal too. Transport behemoth LKW Walter, staffed with eastern European drivers, is not eligible for the UK. Those local drivers still willing to do the job are held up at the newly-created border with the EU in both directions, doing paper work and waiting to be checked, thereby increasing transport deficits disproportionately.
Logistics professionals, chuffing under the strain of ever new bottlenecks, pray for a drop in demand, hoping for a short period of reprieve to recover. Import demand in the US is up 20 per cent since last year, even though the hospitality and accommodation business is still only half way towards full recovery. Are we all buying too much? Again, judging by US imports, this is not reasonable to say. Imports are up 10 per cent when compared to 2019. In other words, we have so far not even replenished what we haven’t bought last year.
What we are suffering from and what is putting alarming pressure on prices is not so much our excessive demand but a cost push beyond national control. Is this, regardless, the time now for central banks to ride to the rescue and fight inflation before it becomes a bad habit?
The tools for our monetary guardians to prevent inflation from getting out of hand are to raise interest rates and to unwind crisis-era asset purchases, in the hope to slow down the economy and thereby to reign in demand pressures. It is a difficult call, hinging on definitions of inflation, perceived labour demands, and whether prices will normalise once our supplies are replenished, in manufacturers’ warehouses as well as in our private lives. Is inflation a transient phenomenon, or is it here to stay, as in the 1970s?
What muddles the picture is the uneven recovery from the pandemic when compared to the oil price shock. After a long period of full employment during the years of the Wirtschaftswunder, labour was expecting a steady improvement of living standards. Inflation compensation was demanded, even in the face of a dwindling economy. Unemployment was as bitter a surprise as it was a universal threat. Inflation was causing pain to the very people who were out of jobs. The pandemic, however, has kept many people in their jobs while making others redundant, still now. Inflation is less of an across-the-board suffering. Supported by generous transfer payments, industries and workers were kept afloat, at least in the industrialised world. To fight inflation now is far from generally demanded.
The benefits of early monetary tightening are controversial and may not even be very effective. If the economy weakens as hoped for by inflation hawks, bottlenecks will ease, for sure, and supplies will stretch further, but the logistics nightmare we are facing now will be repeated once recovery is permitted again. The reflex of hoarding is interest-insensitive.
This touches on the fierce debate whether today’s multiple, inflationary manifestations are ‘transitory’, or threatening to become ‘entrenched’. Looking at our supply chain mess, it’s safe to assume that today’s hoarders’ prices will stay with us for at least another year. It will be difficult to subsume this under the apologetic catchphrase ‘transitory’, as much as it is.
There will be a longer than normal time lag between central bank tightening and the slowing of industrial activity and consumption, as consumers and industrials sit on unusually large cushions of cash which help them to ignore higher credit costs for longer. This increases the risks of an overshoot. As open job positions cannot be filled while the pandemic is still rearing its head, no matter how high the pay on offer, the cost of employment cannot be brought down by credit tightening, defeating the argument. People want COVID-protected jobs, not higher salaries. Inflation is not one of their worries yet.
This should not be an argument against measured tightening. It is difficult to understand why the Fed is still buying mortgage-backed securities when the real-estate market is red hot, for instance. But nudging up interest rates (by themselves inflationary) markedly will limit the budgetary latitude of top-rated national borrowers, expose weaker sovereign debtors, widen eurozone credit spreads and pop the real-estate bubble. It is a matter of opinion if the ensuing mayhem would be preferable to supply pressures of the loo roll kind.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.