Inflation is defined as a general rise in price of goods and services in an economy. It is measured with the help of different indexes such as Consumer Price Index (CPI), Producers Price Index (PPI) etc. The CPI measures the general rise in price of consumer price of goods and services in an economy such as transport price, grocery price, housing price, medicine and healthcare price etc. The PPI measures the price of raw materials which the producers use in manufacturing and production activities.
Supply Chain Management is defined as an association of organization which are networked with a help of upstream and downstream integrations with an objective to create value in the medium of goods and services to ultimately serve the customers. (Christopher 1992). It involves activities such as procurement, logistics etc to provide the customers with the desired products and services as per their convenience with a help of an integrated distribution channel and represent the flow of materials and value-added services through a designated supply chain.
Freight and Logistics activities represent a great cost in the production and distribution activities which can have a significant impact in the end price of goods and products. Logistics Industry is regarded as a significant part of the national economy contributing around 8.6% of GDP of Australia (Department of Transport, Australian Government). The Global Purchasing Managers Index Suppliers’ Delivery Times (PMI SDT), an indicator used by the European Central Bank showed a significant lengthening of suppliers’ delivery times during the COVID-19 era which suggested a significant impact on the import price inflation in the world (ECB Economic Bulletin, 2021).
The Global Supply Chain industry which had been more used to the lean manufacturing and Just in Time Inventory Management was hugely exposed to its major Supply Chain Vulnerability as the Pandemic led to significant increase in the lead times and suppliers’ delivery times followed by underutilization of production and manufacturing capacity by firms all around the world. This could have significantly made them rethink about their lean manufacturing strategy which focused in reducing the inventory they hold in their supply chains (Harvard Business Review, 2020).
Discussion
As Mainland China went into lockdown and COVID-19 related restrictions in 2020, a lot of Australian businesses across a wide sector faced a huge delay of more than few weeks and faced serious difficulties in sourcing materials and products because either their overseas partners were completely closed or working at a very less capacity or utilization rate. Especially the shift in the patterns and trends of the consumers during the period led to a massive global shortage of shipping containers with a huge discrepancy in the location of the shipping containers as some of them were moving empty in different direction or moving along only a one direction. (RBA, 2021)
Source: Reserve Bank of Australia, Refinitiv
The Baltic Dry Index studies the impact of the global shipping costs in the imported price of goods in a large panel of nations. A study from the period from 1992 to 2021 found that the rise in the Baltic Dry Index were accompanied by significant rise in import prices, CPI prices and producer prices and were more long-lasting in countries which imported a large volume of goods in comparison to those countries with lower import volume. The results based on the studies by Swallow Et. al. titled Shipping costs and inflation were able to justify that the global shipping costs indeed had a non-ignorable, consistent and data significant impact on the domestic general rise in price levels. The result was 1 standard deviation rise in the international shipping costs rose the domestic inflation by 0.15% rise in around 12 months. (Swallow, Deb, Furceri, Jimenez, Ostry 2022)
A survey by McKinsey and Co with the CEOs of large corporates recognized that Supply Chain Distortions were their largest risk for their firm’s growth in particular and national economy in general. They cited that this risk had far more implications than the growing geopolitical instability and labour shortages risks. Their post pandemic cost reduction and manufacturing efficiency improvement were driven by their continuous improvement in their supply chain and technological advancement which had now been severely impacted and creating disturbed. (World Economic Forum, Davos Agenda 2022)
The impact of COVID-19 on small and underdeveloped countries and their supply side were more severely as they didn’t have sufficient resources and innovation to cope up with the new normal and sudden change in their demand supply management operations. Furthermore, they relied heavily on other countries for meeting the consumption needs and as a result of COVID-19 led economic protectionism they were left with too low resources to meet up with their demand. It was found that these developing countries were hit by a high level of inflation followed by negative impact on the human development index with totally distorted food supply chains (How COVID-19 Influences the Food Supply Chain, Al-Doori Et. al 2021)
The traditional assumption of continuous availability of raw materials and resources to meet the ever changing and huge demand of goods and products of the customers were tested during the pandemic. The Supply Chains and Operations had been evolved over the decades in these principles of free market and globalization of trade and under the extreme stock and ever lasting distortions created under COVID-19 created a huge shortage of labour, energy and capital which send a global ripple effect in the supply chain and operations activities. Hence the crisis proved to be an unconventional event which created a lot of constraints and uncertainty able to create a simultaneous unavailability of sufficient resources to meet the demand of the consumers (The Shortage economy and its implications for supply chain and operations management, Ivanov Et. al 2022).
The COVID-19 related global supply chain distortions and lockdowns did significantly impacted the financial markets too. These disruptions created a huge volatility in the commodity futures market and had a huge effect on both the short and long run financial market volatility. These activities created a temporary supply disturbance and impacted the production, refinement and distribution of various commodities and the governments were unable to stabilize the volatility and prices and significantly market equilibrium leading to an inflationary pressure in the overall economy. (COVID-19 impact on commodity futures volatility, Zhang & Wang 2022)
The impact of Supply Chain Disruptions was intense especially in the food industry. In Kenya, the COVID-19 pandemic distorted the supply of food supply and food commodities due to the travel restrictions imposed by the pandemic. As a result, there was a huge supply gap which resulted in a large price change in the food commodities. Research reported that households had to adopt various measures like reduction in food consumption, decreasing the food variety and avoiding means were taken to tackle the food shortages. Globally, the adoption of large number of measures such as online working, business closures, air travel reduction and home lockdowns exacerbated a global food crisis and had a huge spill-over effects all around the world. (Influence of COVID-19 pandemic on Food market prices and Food supply in urban markets in Nairobi, Kenya, 2022)
Inflation is largely driven by the future expectations of general price of goods and services in an economy. It is because businesses and individuals have to take a look at the current and past economic data and try to predict the future economic environment and factor that expectation in their present financial and economic decisions. As a result, higher inflation today may lead to higher inflation expectations in the future if not properly managed by the Central Banks and governments. A study based on the Federal Reserve Bank of Atlanta’s Business Inflation Expectations (BIE) found a key information on how the current inflationary condition created by the supply chain disruptions had a potential to further exacerbated the inflation problem. The survey uses a monthly response of the business executives, owners and management personnel US economy. Due to the firm’s continued anticipation of the supply chain distortions and limited availability of labour the businesses had a higher business unit cost expectation going to the next year and future. The supply chains disruptions had affected the goods production and manufacturing ability of the businesses and had put an upward influence in their production and distribution costs. (The impact of supply chain disruptions on business expectations during the pandemic, Meyer, Prescott and Sheng 2023)
Inflation is either demand driven or supply shock driven. When the price rises due to extraordinary or rare cases of temporary demand or large structural changes in the economy, it is demand driven and can only be solved by increasing the supply to match the demand supply mismatch. On the other hand, Temporary supply shocks like pandemic, war etc. can sometimes lead to demand supply mismatch. These supply shocks are largely driven by higher cost of raw materials, labour, scarcity of materials etc. A popular method of measuring Supply shock driven inflation is the Cost-Push Commodity Factor (CPC) which measures the impact of selected commodity prices on the US inflation. Including this factor in a Structural Vector Autoregressive (SVAR) model explains that the United States inflation have been impacted by the price shocks in the commodities and distortions in the supply chain when measured in a sample time period which included the recent COVID-19 period. (Commodity price shocks, supply chain disruptions and US inflation, Diaz, Cunado & Gracia 2023)
Freight is an important part of the supply chain which involves the movement of raw materials between the suppliers and as well the supply of finished goods from the manufacturing plant to the end consumer’s place. The inflation as measured by the consumer price index rose in the pandemic as a result of supply shocks which included the rise in the costs of freight. A study uses Vector Error Correction Model (VECM) to study the relationship between the inflation and shipping costs using disaggregated monthly sample from Jan 2019 to August 2021 and found that the hardest impacted industry of the shock in freight costs were household appliance and garment sectors which were produced out of the European Union area. To add to that, the research showed that following a rise of freight rates higher than $1200 each day led to a higher impact to the freight changes. Due to the pandemic, the port congestion increased significantly followed by the rise in price of global container shipping freight costs led to a sharp rise in the transport and logistics costs. The problem was further increased by the international travel restrictions and cancellations of several flights in the global aviation industry. Because the world trade is highly dependent on the maritime network the rise in cost of shipping container and logistics have a significant cost implication in the consumer goods price. The research found that the inflation related to non-energy industrial goods rose to 0.27% in the first 8 months of 2021 relative to a mean 0.07% contribution from 2014. The research mentioned that the problem was further exacerbated due to the just in time inventory management approach implemented popularly by businesses worldwide which created a domino effect in the supply chains. (The relationship between shipping freight rates and inflation in the Euro Area, Michail, Melas & Cleanthous 2022)
Producers Price Index measures the input price impact felt by the producing managers who are responsible for the manufacturing of goods and products. A study investigated the impact of the COVID-19 led supply chain disruptions in the United States PPI inflation across nations. The study found that the countries where the supply chains were severely impacted saw a huge rise in goods and raw materials prices and this cost push inflation led to the rise in the inflation in those countries who rely most in the firms under this severely impacted economy. In nutshell, the supply chain disruptions in one economy were transmitted to other economies and their domestic prices as a result of import of inflation due to the interconnected and integration of the supply chain of these economies and businesses. (Global Supply Chain Disruptions and Inflation During the COVID-19 Pandemic, Ana & Jeese 2022)
Import Price Inflation is a huge part of the rise in prices in an import-based economy. Thought the largest economy in the World, US still imports a huge goods and products from the world and is significantly impacted by the country specific goods price as well especially China and the Euro Area. Study by Maggie Isaacson and Hannah Rubinton mentioned that the pass through of the shipping costs in the US import price inflation was relatively small. The study estimated that One percent rise in price of shipping cost accounts for a 0.0684% rise in the import price inflation. During the COVID-19 pandemic, as the price of shipping rose to 86% this led to a rise in the import price inflation by 5.87% each year. (Shipping Prices and Import Price Inflation, Isaacson & Rubinton 2023)
Australia’s case with the relationship between Supply Chain Disruptions and impact on business activities seems to be mild. The Reserve Bank of Australia’s business liaison mentions that the impact of the supply chain issues in the businesses ability to continue smooth operations have been only mildly or shortly impacted. Those firms which are largely impacted have started to manage the inventory better by making early orders to avoid the shipping delays. But the supply chain issues are definitely impacting the pricing mechanisms because of the greater costs for PPE and cleaning materials followed by the higher air freight cots and price of containers as experience around the world.
The impact of maintaining the higher level of inventory and shorter order times has indeed created a higher cost pressure in the businesses as they now have a higher carrying and supply chain costs. Maintaining that higher inventory in the warehouse exposes the firms to new firms of risk such as fire, obsolescence, theft which significantly increases the security, maintenance and insurance costs which normally will be passed onto the selling price of the goods and products hence causing an inflationary pressure in the broader economy.
The European Central Bank’s empirical studies present that the COVID-19 led supply chain disruptions had led to almost one third of the pressure in the international production channel. It was due to the higher delivery times in the supply chains followed by the unexpected rise in the post pandemic demand of the consumers due to the pend up demand in the economy along with the higher accumulated savings of the citizens.
Conclusion
COVID-19 was a real stressful time for the Supply Chain Industry as they were exposed to their vulnerabilities and had a very least time to respond by changing their supply chain. This significantly reduced their economies of scale and competitive situation to offer goods and services in a reasonable and consistent manner as they used to do before the pandemic hit the globe. They had to respond to a completely unanticipated and unplanned situation and were left exposed without any contingent plans and demand supply projections. This resulted in a huge shipping delay, rise in price of freight and hence they had to pass on the higher cost to the consumers hence leading to rise in inflation to a certain extent.
But inflation was not solely attributed to the Supply Chain Distortions but also to a wide range of other factors. Such factors include sudden excessive consumption patterns of the consumers after a higher accumulated savings during the pandemic, rise in international travel and migration in some countries which lead to the rise in airfares and rents and housing costs in some advanced countries like Australia, Canada etc. Furthermore, Geopolitical tensions between China USA followed by the Russia-Ukraine Conflict was responsible for the rise in the inflation after the Pandemic as the price of gasoline and energy skyrocketed around the world along with the rise in food prices as these countries export a lot of food crops like Wheat around the world.
Relying on multiple supply chains in the Global Value Chain seems to be the need for the businesses around the world in the new era of more vulnerable supply chains. This will better manage the risk and likely lead to less volatility in the prices hence inflation in the economy. Increasing firms have begin to realise the necessity to move their production from China to Southeast Asian economies to have a different logistics strategy (Harvard Business Review, 2020).
Hence, the existing literature suggests that the greater work backlog and increased container shipping cost along with the higher shipping delays led to a significant contribution to the recent global surge in inflation which is somehow heterogenous and country specific in nature.
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