Managing Supply Chains Amid Inflation

Today, inflation has affected nearly every aspect of the global supply chain. It has forced the companies to pass on the increase in input costs to end users even at the risk of losing market share.

Supply chain disruptions, labor shortages, and reopening of economies have caused increase in prices, with the COVID-19 lockdowns in China and Russia-Ukraine war aggravating the situation.

Inflation And Slowing Growth

In the first quarter of 2022, the U.S. economy shrank 1.4% and in Europe, the recovery slowed down with a growth of 1.08%. The forecast for Q2 is also bleak amid interest rate hikes across large economies to rein in the runaway inflation.

According to research by the US Federal Reserve, supply chain disruptions account for half of the surge in U.S. inflation.

The headwinds from outside the U.S. have made the Federal Reserve’s policy pivot more challenging. Exports fell by 5.9% while imports increased by 17.7% in Q1. The imports were high because of the increase in demand for consumer goods and technological equipment, while the exports were low as the trade for capital goods and vehicles slowed down.

The inflation rate in the US accelerated to 8.6% in May of 2022, the highest since December 1981.

The monthly food price index from the UN’s Food and Agriculture Organization (FAO) increased by 12.6% between February and March to reach the highest level since 1990.

The China Effect

A major part of global manufacturing is done in China and it has six out of the 10 busiest ports. Thus, if China continues with lockdowns and its zero-Covid policy, it is likely to add pressure to the already tight global supply chain and stoke the inflation in the U.S.

The Russia-Ukraine war has not only increased the prices of oil and energy but also disrupted the global supply of food and fertilizers, adding to the inflationary pressures.

The FAO’s cereal price index rose 17.9% in March, reflecting a surge in global prices of wheat and coarse grains, largely due to export disruptions from Ukraine, one of the world’s largest wheat exporters.

The US is facing many headwinds but none are enough to completely stall the economy. But there are widespread fears that the U.S. economy is headed towards a recession.

What To Do Next

Companies need to plan ahead and be ready for the changing conditions. They should put efforts into building a diversified supply chain so that they are less impacted in case of any global disruptions. They should make certain strategic decisions like where to hedge for pre-buying the raw materials and invest in automation.

Higher prices are expected to erode purchasing power which will lead to slower consumer spending, slower growth, and higher inflation.