--- title: "Supply Chain Inflation: Transitory Doesn’t Mean Fast" description: "The drivers of recent inflation are deeply rooted in supply chains." language: en canonical: https://www.flex.thisisbrew.com/blog/supply-chain-inflation-transitory-doesnt-mean-fast/ lifecycle: live --- # Supply Chain Inflation: Transitory Doesn’t Mean Fast Is the inflationary bubble bursting? A lot is hinging on the answer. Fed Chairman Jay Powell has [indicated](https://www.federalreserve.gov/newsevents/speech/powell20210827a.htm) inflation is transitory and so monetary policy support is still needed. By contrast Senator Joe Manchin has cited inflationary worries for limiting his [support](https://www.wsj.com/articles/manchin-pelosi-biden-3-5-trillion-reconciliation-government-spending-debt-deficit-inflation-11630605657) for the Biden administration’s infrastructure plans. Recent data shows **inflation is slowing** from high levels. The U.S. Consumer Price Index [increased](https://www.bls.gov/news.release/cpi.nr0.htm) by 5.3% in August, slightly down from 5.4% in July. At the same time, U.S. international [import price inflation](https://www.bls.gov/mxp/) slowed to 9.0% in August from 10.3% in July, marking the slowest rate of growth since March. The two data points have raised [hopes](https://www.wsj.com/articles/us-inflation-consumer-price-index-august-2021-11631564849?page=1) that the current bout of inflation may be over. Not so fast. The drivers of recent inflation are **deeply rooted in supply chains** and are playing out over quarters, not months. First, price **inflation is a global issue** and not just one driven by U.S. consumer demand. The U.K. [consumer price index](https://www.ons.gov.uk/releases/consumerpriceinflationukaugust2021) increased by 3.0% year over year in August, up from 2.1% in July. Additionally, [China](https://www.reuters.com/world/china/chinas-factory-prices-rise-fastest-pace-since-august-2008-2021-09-09/)’s producer price index also increased to 9.5% in August from 9.0% in July, marking a 13 year high. Second, cost inflation is not a new phenomenon and has had **many contributing factors**. US [import prices](https://www.bls.gov/web/ximpim/beaimp.htm) had increased in 14 of the past 15 months before August. A drop in oil and fuel prices was the major driver of lower import prices and have since [increased](https://www.bloomberg.com/quote/CL1:COM?sref=ZdtLveG1) in September. At the [product](https://www.bls.gov/web/ximpim/harmimp.htm) line, import prices for plastics, base metals and semiconducting devices all continued to expand. Third, the transmission of higher input prices to customer prices can take **an extended period** of as much as six- to nine-months even in commodity sectors such as [coffee](https://www.jdepeets.com/siteassets/documents/jde-peets-transcript-hy-21-earnings-call.pdf#page=5). Inflation can also become more permanent if manufacturers and retailers believe they have effective pricing power, as several [automakers](https://www.ft.com/content/f55a1d96-1146-4e17-88a9-1a0fbaf57de6) have already indicated. Similarly, consumer’s inflationary expectations can become more fixed the longer inflation stays elevated. Fourth, the **fundamental demand- and supply-side drivers** of higher prices may not disappear quickly. Examples include: - **Semiconductor** [shortages](https://www.wsj.com/articles/intel-intc-2q-earnings-report-2021-11626899296) may last all the way through 2022, particularly for the [automakers](https://europe.autonews.com/automakers/mercedes-vw-bmw-warn-chip-shortage-could-last-until-2023) and a [wide](https://www.cnbc.com/2021/08/24/bosch-says-semiconductor-supply-chains-in-car-industry-no-longer-work.html) [range](https://www.bloomberg.com/news/articles/2021-09-13/3m-doubles-its-estimate-for-drop-in-car-output-on-chip-shortage) of suppliers. - Factory closures in Southeast Asia linked to the **delta variant** of COVID-19 are exacerbating shortages in sectors such as [electronics](https://www.wsj.com/articles/covid-19-surge-in-malaysia-threatens-to-prolong-global-chip-shortage-11630234802?mod=djemlogistics_h) in Malaysia and [apparel](https://www.wsj.com/articles/vietnams-factory-shutdowns-tug-at-apparel-industrys-seams-11630661403) in Vietnam. Endemic COVID-19 will continue to cast up such issues. - **Labor shortages** remain prevalent in [Europe](https://www.cbi.org.uk/media-centre/articles/labour-shortages-will-continue-in-face-of-government-inaction-delaying-uk-economic-recovery-director-general/) as well as the [US](https://www.bls.gov/jlt/#news), particularly in [capital equipment](https://www.ft.com/content/7fc32703-8382-451f-950f-6e4678f1b87f) and could take a significant period to clear. - Energy prices are volatile but the EU in particular [faces](https://www.bloomberg.com/news/articles/2021-09-15/soaring-european-gas-prices-force-fertilizer-plants-to-shutter) a **gas supply crunch** that is already affecting factories and may generate several months of elevated costs. - The forthcoming US **Infrastructure Bill** may provide a multi-year [inflationary spur](https://www.cnbc.com/2021/08/25/what-happens-next-with-biden-infrastructure-budget-bills-in-congress.html) to higher demand for building materials, [renewable energy](https://www.reuters.com/business/energy/biden-clean-energy-plan-key-restoring-industry-job-losses-says-us-official-2021-07-19/) equipment and other infrastructure products - Many **logistics** industry participants have [indicated](https://www.wsj.com/articles/u-s-ports-see-shipping-logjams-likely-extending-far-into-2022-11630843202) constraints in ocean freight will continue at least through lunar new year 2022. Trucking, meanwhile, faces staffing challenges on [both](https://www.bbc.co.uk/news/business-58498427) [sides](https://www.wsj.com/articles/big-truckers-say-vaccine-mandate-could-push-drivers-away-11631657882) of the Atlantic. [Sign up](https://www.flexport.com/logistics/freight-market-update) for the Flexport Freight Market Update. Finally, exogenous factors such as **extreme weather and geopolitical risks** have added additional stresses. Hurricane Ida has caused disruptions and price rises for [building materials](https://www.nytimes.com/2021/08/31/business/hurricane-ida-supply-chain-shortages.html) plastics and [oil](https://www.marinelink.com/news/louisiana-offshore-oil-port-fully-reopens-490538) while the coup in Guinea which has been linked to record [aluminum](https://www.bloomberg.com/news/articles/2021-09-13/aluminum-powers-toward-3-000-as-supply-snarl-supercharges-rally) prices. So, **supply chain inflation is not new and may not go away** until well into 2022, feeding consumer price rises for months after that. The persistence of cost inflation requires a continual review by supply chain decision makers of their budgets, their mix of short- and long-term purchasing policies and their customer pricing strategies. --- *This is a markdown version of [https://www.flex.thisisbrew.com/blog/supply-chain-inflation-transitory-doesnt-mean-fast/](https://www.flex.thisisbrew.com/blog/supply-chain-inflation-transitory-doesnt-mean-fast/) for AI/LLM consumption.*