How Inflation Impacts Your Supply Chain
The interconnectedness of global supply chains means that when one price goes up, others tend to follow. Increases in labor, energy and transport costs are contributing to inflation around the world, posing difficult policy challenges.1
While consumer price inflation has been relatively low and stable for the last 20 years, the last few months have seen a big jump in price growth alongside lots of discussions about the role of supply chain disruptions.
Current Source of Inflation
In December 2021, consumer prices, measured by the Consumer Prices Index (CPI), were 5.4% higher than a year previously in December 2020. This price increase (the annual rate of inflation) is up from 4.2% in the year to October 2021 and represents the highest rate since March 1992 (when it stood at 7.1%).
The increase in inflation has been driven by the rising prices of goods. Service prices have also started to recover (or at least they had before the Omicron variant of the virus that causes Covid-19 induced further restrictions).
The pressure on goods prices reflects the dramatic change in our lifestyles since the start of the pandemic. Whether out of necessity to address our new living and working arrangements, or because many sectors had to shut down, demand quickly shifted from services (such as catering, accommodation and entertainment) to goods (such as food, beverages and consumer goods). This unexpected demand, combined with the effects of Covid-19 on production, severely affected the availability of such goods and, with it, their prices.
Where Supply Chain is Felt
Producers generally set prices to maximize their own profit. Sometimes they make pricing decisions that do not make the most profit immediately but provide future benefits (like brand loyalty) or increase demand for other products. But ultimately, firms seek at the very least to cover the costs that they incur in production. This raises the question as to whether recent price increases come from increases in the costs of inputs. Which input costs have gone up?
The main inputs, and therefore costs, vary by industry. But broadly speaking, most costs come from paying workers (labor), the goods and services needed for production (such as raw materials), the costs of use of machinery and technology, and logistics (storage and transport).
If the costs of any of these go up, there may be pressure on firms to raise their prices. If all of them go up, there will be greater pressure. When the inputs that are common to most firms go up, more sectors increase prices further, raising the costs for the sectors they supply. This is the supply chain of inflation.2
- Labor Costs: Recently, firms in many sectors have faced difficulties recruiting. This drives up wages in those sectors, and workers have rightly sought wage increases to cover the rising cost of living. This has meant that average weekly earnings are rising across most sectors (including private, public, services, finance, manufacturing, construction and wholesale).
- Energy Costs: The recent increases in energy costs will not be a surprise to anyone. Oil supply is constrained somewhat due to sanctions on Iran, while gas supply is affected by geopolitical factors related to Nord Stream 2, the controversial new pipeline due to bring Russian gas to Germany through the Baltic Sea.
- Freight and Distribution Costs: In the past year, there has been a steady increase in the container freight index, which approximates the cost of transporting goods via shipping liners. The index peaked at $10,839 last September, reaching a level that was almost ten times higher compared with two years before ($1,279). Other freight costs, such as air freight, have risen similarly.
These rising costs reflect many things. One driving force behind the rising cost of freight is the higher oil price. But there are also factors directly related to Covid-19.
Inflation and Your Supply Chain
When prices go up, your organization’s supply chain bears the brunt of the burden. This increase in cost can be felt through your supply chain by incurring higher prices for supplies and services that your organization needs to operate. While unavoidable, there are steps you can take to mitigate the financial impact of this rise in prices.
Forecasting economic downturns, like rising inflation rates, can play a huge role in protecting your supply chain. Inflation rates can increase at a slow but steady clip and can dramatically impact your supply chain all at once. To avoid the harm of inflation, it can be incredibly useful to develop a process and strategy for how your organization can react to the reduced purchasing power of the dollar.
An effective countermeasure against inflation is to build up your capability to adapt to rising prices. There are many ways to go about doing this, and the specifics can change depending on your industry, however having alternative suppliers or sources of raw resources can help your organization avoid a sudden spike in costs.
Your organization can counteract the burden of inflation by optimizing your supply chain through the help of Exporta Wholesale. Exporta Wholesale is the largest marketplace connecting suppliers in Latin America with buyers in North America. Today, we have a network of over 5,000 Latin American suppliers serving a variety of consumer goods and product categories in the United States.
Collaborating with Exporta on your supply chain needs can assist your organization in sourcing new and alternative suppliers, helping your supply chain more easily adapt to potential disruptions such as the COVID-19 pandemic. The collaborative effort between your business and Exporta Wholesale can act as supplemental tool in bolstering your budget against changing prices.
Additionally, Exporta Wholesale can provide you with secure pricing so that your expenses can remain the same even as inflation rates rise.
About Exporta Technologies
Exporta Wholesale is the largest marketplace connecting suppliers in Latin America with buyers in North America. Today, we have a network of over 5,000 Latin American suppliers serving a variety of consumer goods and product categories in the United States.
Exporta’s marketplace offers buyers a full service experience in the origination, sourcing and managing of products. The platform was founded on the idea that curation and service are the most important elements in the buyer’s journey. Exporta’s marketplace is building technology that addresses the pains of sourcing products internationally at attractive prices.