Editorial: Price pressure
The economic danger of the pandemic has come from an unexpected source.
By Patrick Flannery
Inflation in Canada hit 4.1 percent in August, according to Statistics Canada, and 5.3 percent in the U.S. The Bank of Canada is predicting it to stay above its “control range” of one to three percent for the rest of the year, then subside back to a more normal two percent in 2022. Here’s hoping it is right. One thing is for sure, once the prices of things go up, they don’t come down for a long time, if ever.
I’ve been worrying about inflationary conditions since at least spring of 2020 when it started to become clear that the pandemic was not going to slow demand in most sectors, and actually act as an accelerator in others. Even then, it was clear that it was going to be hard to meet that demand with the restrictions on moving around, congregating and international shipping that were in place. What I didn’t anticipate was the lack of slack in the capacity of our supply chains, leading to bizarre shortages of things you tend to think are in infinite supply, like shipping containers. Supply chains tend to be able to absorb hits to one or two links by replacing those links with different suppliers or suppliers in other areas, or by creatively bridging the gap in the chain by shifting to other products or using different delivery methods. But the pandemic hit everyone, everywhere, at every position on the supply chain all at the same time. And every supply chain has its weak links: bottlenecks where all else is dependent on few or even only one supplier. Impacts at the lowest end of the chains – commodities and raw materials – disrupt multiple chains. And impacts to parts of the chain where alternate suppliers can’t be easily found and production can’t be easily ramped up to clear backlogs – computer chips, for example – create not only broad but long-term shortages.
If you remember the old supply and demand curve in Economics 101, the price of things is where the two curves intersect. When the demand curve shifts upward, the price shifts upward if the supply curve stays the same. That’s what I thought was going to happen when I looked at things early last year. And it has. But what has also happened is the supply curve has shifted down the graph. That brings the price intersection back down toward where it was before, but with fewer goods and services delivered. That’s bad. It’s called economic decline – a shrinking market where less goes on even though demand is still being met and suppliers are still selling at the same price.
So far, with the inflation numbers being what they are, it looks like demand is still outstripping supply by a large margin. But if that goes on indefinitely, higher prices will eventually eat up savings and demand will slip. That will disincentivize manufacturers to invest towards increased production, creating a long-term reduction in supply. Then it becomes a matter of regular, long-term growth to restore activity to where it was before, during which time we’re all a little poorer and doing less business.
So we need to cross our fingers and hope that the Bank of Canada is right in its assessment that the present inflation numbers are the result of shocks to the economy from the pandemic that will dissipate as life returns to normal. And we need to hope that our equipment manufacturers can find ways to get the parts and production capacity they need to clear the present backlogs. These supply issues have derailed the strong general recovery I predicted last year. But equipment rental stores appear to be doing fine, and event rentals are at least back in business. Let’s hope our supply chains can figure things out before the party stops.