We have heard a lot about the supply chain crisis as we recover from the pandemic recession. As the economy rebounded, there were shortages of many items as the economy was unable to produce and ship the volume of goods demanded. Many of us see this supply chain crisis as the main factor behind the rise in inflation that we have witnessed over the past year.
I expect the many items that have skyrocketed in price over the past year to see prices stabilize and decline as the supply chain crisis subsides. I have repeatedly used the case of televisions as an example. TV prices had been on a downward trajectory for decades, but the TV CPI index rose 8.7% between March and August last year. The index then reversed and has since fallen 6.3%, reversing most of the previous increase.
Another example is used cars. Used car prices have skyrocketed in 2020 and 2021, with the index rising by more than 50% between February 2020 and January 2022. However, prices started falling in February. In a private price index, as of mid-March, used car prices had fallen almost 6.0% from their January peak.
If we see a comparable price drop for other items that have seen extraordinary price increases over the past year, such as appliances, clothing, and home furnishings, that will significantly reduce the rate of inflation in the future. ‘to come up. The key factor in this story is resolving the supply chain crisis.
This is where inventory comes in. Inventories fell sharply in 2020, as many companies cut production sharply or shut down altogether at the start of the pandemic. Inventories started to rise later in the year, but not as fast as consumption. Large parts of the service sector remained closed, so people shifted their consumption from areas like restaurants and travel to cars, televisions and appliances.
But demand is now coming back the other way. People are going to restaurants at about the same rate as before the pandemic. Although air travel is still slightly below the pre-pandemic rate, most of the remaining gap is likely due to reduced business travel. (I had several flights last week and they were all full.)
Either way, this shift to services means that people either have to reduce their demand for goods or spend more of their income, and therefore save less. So far in the recovery, the savings rate has remained relatively high, even as pandemic payments and unemployment insurance top-ups fade in the past.
This may change in the future as people spend on the savings they have accumulated during the pandemic. However, it is also possible that they are paying for their increased demand for services by reducing their demand for goods.
In this story, it should be noted that the overall consumption is not particularly high at the moment. Overall consumption in January, the last month for which we have data, was 5.0% higher, after adjusting for inflation, than in the fourth quarter of 2019. This implies an annual growth rate of 2.3 %, which is roughly in line with longer-term trends. .
While aggregate consumption is not out of step with its longer-term trend, demand for goods is. Consumption of durable goods increased by 25.7% in January compared to the fourth quarter of 2019 and consumption of non-durable goods increased by 13.0%, implying respective annual growth rates of 10.9% and 5.7%. If consumption of goods falls back closer to its trend growth trajectory, we will see an inventory glut.
Here is the image for non-automotive retail stocks.
As can be seen, there has been a sharp increase in recent months, with the January level standing 16.1% above the February 2020 level. We saw a further 1.2% increase in stocks non-automotive in February, putting them 17.4% above their pre-pandemic level. Cumulative inflation for non-automotive goods over this period was 12.1% (much of it due to rising gasoline prices), meaning that if consumption of goods fell back to its we would be back to pre-pandemic inventory – at -sales ratios and the supply chain crisis would be largely behind us.
The image is even better at the wholesale level.
These data (which include vehicle inventories) have increased even more strongly in recent months. If we include the 2.1% jump in February, wholesale inventories were 20.8% higher than their pre-pandemic level. And wholesale stocks usually end up becoming retail stocks in the near future.
These data suggest that in many categories of goods, we should have a very adequate supply in the not distant future. This will be especially true if we see the consumption of goods and services return to more normal patterns.
In this regard, it should be noted that strong spurts in the consumption of goods tend to be followed by a drop in consumption in future periods. If people buy a new car or a new refrigerator in 2021, they are unlikely to buy another car or another refrigerator in 2022 or 2023. The huge explosion in consumption of goods that we have seen in 2020 and 2021 should be another factor, in addition to the gradual reduction of the pandemic, leading to a shift towards services.
In short, inventory data indicates that we should be nearing the end of shortages due to supply chain issues. That doesn’t mean there won’t still be plenty of items, especially new cars, that will be in short supply, but that will be the exception rather than the rule. In this story, we are likely to see price declines across a wide range of items, pushing inflation down through the rest of 2022.
Remarks: Car supply was limited by a global shortage of semiconductors due to a fire at a major semiconductor factory in Japan. This is a separate issue from more general supply chain issues.
This first appeared on Dean Baker’s Beat the Press blog.