How the Supply Chain Forces Inflation

I have written in the past about how interest rates should remain steady for the foreseeable future, and even more recently, I have changed my tune and expressed concern about the inflation clouds that are forming on our economic horizon, and how this could affect the current – and very robust – recovery.

Across almost every single product category, shortages due to the disruption in the supply chain have emerged everywhere, from computer chips to exercise equipment to breakfast cereal, and just about everything in between. In February, anticipating a summer closer to home, I ordered new deck furniture, and it has yet to arrive all these months later; we are told the teak manufacturer has shuttered its plants in Malaysia and there is no indication when our furniture will ship. 

The Waiting. In an era in which we have become accustomed to clicking and waiting for whatever we desire to arrive at our doors, we have experienced the shock of not being able to buy toilet paper, having to wait months for curtains, and having to compromise on the color of our new cars. 

The pandemic has disrupted nearly every aspect of the global supply chain, which is the usually invisible pathway of manufacturing, transportation and logistics that gets goods from where they are manufactured, mined or grown to where they are going. At the end of the chain is another company or a consumer who has paid for the finished product. 

So now scarcity has caused the prices of many things to go higher. And it is not just production constraints that are forcing up prices, as the transportation bottleneck is also a factor, as ships and containers find themselves improperly positioned, and ports unable to muster the manpower to unload ships when they do finally arrive.

Rising vaccination rates and the nearly $2.8 trillion in federal spending approved since December 2020 have produced a recovery like none in recent memory. But inflation has soared this year, with core prices that exclude volatile food and energy categories, the Fed’s preferred gauge, up 3.6% in August from a year earlier. 

The Fed has indicated it is now somewhat more concerned about higher inflation and said it would watch carefully for signs that households and businesses were expecting sustained price pressures to continue. 

Chairman Powell recently stated that supply-side constraints have gotten worse, and the risks are clearly now to longer and more-persistent bottlenecks, and thus to higher inflation. While the Fed has anticipated that price pressures would abate as the pandemic subsides, it has stated how important it is for the central bank to stay flexible in the months ahead. The central bank will need to make sure that its policy is positioned for a range of possible outcomes. That translates into uncertainty about where inflation ends up, in both scope and duration.

When Will Shortages End? No one really knows, but there are good reasons to suspect that this will be with us well into 2022 and possibly beyond. Shortages and delays have already started to affect this year’s Christmas and holiday shopping season by making it much harder to find key goods. A lot of companies ordered earlier, which is exacerbating the shortages, sending more surges of goods toward ports and warehouses. 

All of this will impact the construction aggregates industry, as shortages of all manner of building products could add further pressure on project starts and construction timelines, not to mention key replacement parts utilized in repairs and maintenance. 

And aggregates are not without their own pricing pressures; in many markets, we have already seen price increases that are commonly well up in the single digits, with some exceeding 10% and more over the same period last year.

For our industry, watching costs becomes paramount, and the hope is that increases can be passed on to the customers. Without that ability, margins will otherwise be pressured and profits will suffer. Aggregates producers should pay careful attention to all their costs and adjust accordingly.

Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers and acquisitions. He has a career spanning almost five decades, and volunteers his time to educate the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected] Follow him on Twitter @allenvillere.

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