TD – Posthaste: If your morning cup of coffee doesn’t cost more now, chances are it’s about to
Consumers should brace themselves for price increases on all kinds of goods — from new appliances to their morning coffee, says a new report from TD Economics.
The reason? Global supply chains are getting squeezed, causing shipping costs to rise. That, along with a shortage of key manufacturing components, such as semiconductors, is raising prices for businesses. And it’s only a matter of time before firms pass those increases onto consumers.
The report breaks down what’s going on with the world’s supply chains and where we can expect things to go from here.
It all started with the onset of the pandemic in 2020. Lockdowns stranded empty shipping containers across Europe and the United States as demand tanked. In the second half of the year, however, demand bounced back. That caused rates for shipping freight to climb “because too much money was chasing too few containers,” writes TD Senior Economist Sohaib Shahid.
But that was just the beginning. In February 2021, a ship blocked the Suez Canal, exacerbating shipping container shortages. Ships were forced to take long, expensive detours, which increased costs even more. While the blockage didn’t last long, those delays are expected to have an impact on supply chains for months, Shahid writes.
Adding to the pain is a semiconductor shortage. Increased global demand and stockpiling by companies worried about getting future shipments have made the problem worse. The auto industry has born the brunt of the shortage, but the impact is spreading. Appliance and computer production are now being affected, too. Amid all this, consumer demand for these goods is expected to jump as lockdowns and other virus-related restrictions ease and people start spending again.
It’s no surprise then, that business costs are rising. Producer prices are up 0.9 per cent quarter-on-quarter, the report says, which is much higher than the averages of the past two years (clocking in at -0.2 per cent in 2020 and 0.1 per cent in 2019).
Businesses will need to decide if they’re going to pass those costs onto consumers. And chances are, writes Shahid, they will. In the United States, Whirlpool has already said they’d increase prices on appliances until the end of June. Proctor & Gamble has also said to expect higher prices starting in September. Prices are rising globally, too. The report points out that some toy wholesalers in China have already raised prices by 15 per cent.
“The impact of these developments on CPI inflation is not a matter of ‘if’ but when’,” Shahid writes. “So, if the price of your coffee hasn’t gone up yet, don’t think it won’t go up in a few months from now.”
How much prices do increase all depends on how long these disruptions last. And it’s not looking good.
TD Economics says we can expect supply chain issues in the medium-to-long term, though businesses are working to bring their suppliers closer to home. Even that will add more costs, though, as companies stop using cheaper parts from far away.
And because businesses lock in annual rates with freight carriers, we can expect higher shipping costs to persist as well. TD points to rates in the Asia-North America corridor, which are 50 per cent higher than a year ago.
How can these problems be solved? Building new ships is one way, but it’s not a quick fix. Producing more shipping containers would be faster, but they are so expensive right now that many buyers wouldn’t be able to afford them. And even if there were enough shipping containers, other factors such as infrastructure issues at ports stand in the way.
“There is no easy way out,” Shahid says.
One final warning on supply chain problems: they have broader implications, beyond just inflation.
“Don’t forget,” Shahid writes, “supply chain disruptions … have the potential to dampen the economic recovery.”