Economic instability has been ever-present since the start of the pandemic. Following more than two years of unpredictable economic changes, we’re now facing the most serious period of inflation in decades. Rising costs have an everyday impact on everyone, whether directly or indirectly. One area particularly feeling the strain is the global supply chain, which has been faced with unprecedented challenges and is now also dealing with skyrocketing prices.
What Is Inflation?
In economic terms, inflation is defined by the International Monetary Fund (IMF) as “the rate of increase in prices over a given period of time”. They say inflation is “typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country”, although it can also be calculated for certain goods or services.
With a slightly different perspective, Investopedia says that inflation can be “translated as the decline of purchasing power over time”, and that the rise in prices “means that a unit of currency effectively buys less than it did in prior periods”.
By either definition, during times of inflation, people pay more than they did previously for the same products and services and get less value for their money.
What Causes Inflation?
In each case of inflation, one or a combination of factors have resulted in prices increasing. Forbes lists five key contributing factors:
- Demand-Pull Inflation — When demand for goods increases but supply doesn’t increase correspondingly, so products become scarcer and more valuable.
- Cost-Push Inflation — When production costs increase forcing businesses to raise their prices to make up the difference.
- Devaluation — When a currency loses value compared to other currencies, making imports more expensive.
- Rising Wages — When rising wages lead to increased disposable income and subsequently demand, which results in businesses raising prices to cover higher production and labor costs.
- Inflation Expectations — When expectations of inflation lead to workers requesting higher wages to offset the increased cost of living and businesses are forced to raise prices as a result.
Inflation in 2022
Huge price rises have hit the U.S. hard, with gasoline, food, and vehicles being among the worst-hit commodities, and in June 2022, the Consumer Price Index (CPI) reported an inflation rate of 9.1%, making it the largest increase in 40 years. So, how did we get here?
The global economy has been in a state of tumult since the onset of the COVID-19 pandemic more than two years ago. Although the viral outbreak initially resulted in recession, its continued impact around the world has contributed toward current inflation. Lockdowns have taken place intermittently in various countries, causing production to cease and the supply chain to stumble. China has been the most notable recent example, where a complete lockdown of Shanghai — whose port is critical for worldwide shipping — from April until June caused severe disruption in the global supply chain.
In the U.S., only a relatively short initial lockdown took place, but a different response has contributed to inflation. Across three payments from April 2020 to March 2021, the IRS issued more than $3,000 of economic impact payments (commonly known as ‘stimulus checks’) to citizens, and the government set out additional monetary policies to counter the initial economic downturn. The injection of money into the economy resulted in ‘demand-pull inflation’, with production not able to keep up with the increase in demand.
Another key domestic contributor to inflation has been the continued labor shortage. In July 2022, the U.S. Chamber of Commerce reported that there were 11.3 million open jobs in the country, but only 5.9 million unemployed people. This race to fill positions, along with the need for companies to retain current staff, leads to businesses offering higher wages and being forced to increase their prices to cover the inflated cost of their workforce.
Arguably the most impactful event in 2022, however, has been Russia’s invasion of Ukraine. As countries reprimanded Russia for its hostility, sanctions on Russian imports caused prices to skyrocket. The sanctions were particularly responsible for the inflated price of gas and oil, as Russia produces 17% and 12% respectively of the world’s entire quantities. Both Russia and Ukraine are also key global exporters of grains and other foodstuffs, which resulted in consumers paying more for their groceries.
Inflation and the Supply Chain
Inflation and the supply chain have a symbiotic relationship — each affects the other.
The global supply chain remains in an extensive period of disruption. The aforementioned lockdowns and labor shortage have restricted production and manufacturing, and efforts to increase supply to meet demand have only served to cause record backlogs at ports around the world and decelerate the shipping and transportation of goods. These inefficiencies have led to product shortages, which raise demand and ultimately pressure businesses into increasing their prices and further exacerbating inflation.
On the other side, periods of inflation directly impact the supply chain and companies throughout the sector. When the price of raw materials increases, manufacturers with rigid budgets are forced to limit production, resulting in product shortages, empty shelves, and unfulfilled orders. Transportation companies are heavily reliant on affordable fuel to be able to operate at full capacity, so when fuel costs increase, the delivery of products becomes less consistent. And with rising wages eating into profit margins, many businesses decide to reduce their staff, which limits their output and operational efficiency.
Counter Inflation and Supply Chain Disruption — Join a GPO
With economists at the IMF projecting that inflation won’t reach normal levels (around 2%) until late 2023, you need to act to protect your organization. One solution is to join a group purchasing organization (GPO), which will help you save money and build a stronger, more resilient supply chain at no cost to your company.
A GPO is an organization that combines the purchasing power of its members to negotiate exclusive discounts with a multitude of suppliers and manufacturers. By gaining access to these discounts, you can counter the effects of increased prices, limiting the impact inflation has on your organization.
Your GPO will also facilitate connections between your company and its contracted suppliers. So, when your supplier can’t fulfil an order, you’ll have a variety of alternatives to rely on, building the resilience of your supply chain and assisting you in combating product shortages and supply chain challenges.
At CNECT, we work with more than 9,300 organizations to reduce their costs and procure the products they need. If you’d like support in your efforts to thrive during this time of inflation and supply issues, get in touch with our helpful team today or apply to become a member.