The first step toward understanding the Great Supply Chain Disruption of 2021 is to recognize that the phrase itself is not quite accurate. Supply chains are not disrupted so much as overloaded, and the effects are more national than global.
This understanding has implications not only for U.S. consumers but also for the Federal Reserve. It means that inflation is transitory and is unlikely to spread to the rest of the developed world. So the Fed and other banks shouldn’t raise interest rates in the near future—and consumers needn’t worry that products such as Chinese-made toys will always be so expensive.
To be sure, there have been some specific Covid-related supply-chain disruptions that have led to narrow inflation. For the most part, however, inflation is being driven by rising energy and transportation costs.
Container shipping rates, for instance, were more than five times higher in September 2021 than they were in September 2020. Making matters worse, overall congestion rates, especially at U.S. ports, were as high as 80%, meaning there were four times as many ships waiting for a berth as were docked at any one time.
That congestion is primarily a product of dramatically higher volume. U.S. retail sales soared in March and today stand roughly 20% higher than they were in December 2019.
By contrast, retail sales in Europe are up just 4%. Likewise, in Antwerp and Rotterdam congestion rates were just over 20% in October.
That difference is reflected in the inflation rate. In the euro zone, prices were up only 3% year-over-year in September, compared to 5.4% in the U.S. Moreover, core inflation (which doesn’t count food and energy prices) was up only 1.6% in the euro zone, compared to 4% in the U.S.
What about energy? The U.S. consumer price index for energy was up 24% year-over-year in September. The average price of gasoline rose more than $1 per gallon during the same period.
The problem, however, is not on the supply side; thanks to the shale revolution, the U.S. can produce far more crude oil now than it could in the mid-2010s. The problem is that the U.S. shale oil industry was hit hard both by the collapse in demand due to the pandemic and uncertainty about how long the crisis would last.
Over the last eight months, in fits and starts, demand has picked up. But with little clarity about future demand, drillers have found it difficult to find financing. Only now that oil has passed $70 per barrel has the rig count turned upwards. It will take some time to fully rebuild operations, but the limiting factor was and remains demand uncertainty.