Supply chain shortages are impacting the global market, here’s why
Supply chain bottlenecks are creating shortages and price inflation around the world. Biden released a plan that could help ease the jam at LA ports.
Just The FAQs, USA TODAY
WASHINGTON — A warehouse worker in Tennessee is running up against price increases that far exceed her modest pay raise.
The owner of a pastry business in Massachusetts has had to reduce his product offerings and personally absorb higher costs.
A grocery chain executive in Connecticut said he’s splitting his higher costs with his suppliers so he doesn’t have to raise prices across the board.
Across the United States, in homes and in businesses, the highest inflation in a generation is heightening financial pressures and forcing people to adapt to a new reality.
The government’s report Friday that consumer prices jumped 6.8% over the past year – the highest such inflation rate in 39 years – showed that some of the largest cost spikes have been for such necessities as food, energy, housing, autos and clothing. They are goods and services that millions of Americans regularly depend upon in their daily lives.
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Especially hard hit are lower-income households with little or no cash cushions. For them, the acceleration of consumer prices has negated any higher wages they may have received. The price surge has also complicated the Federal Reserve’s plans to reduce its aid for the economy and coincided with flagging public support for President Joe Biden, who has been taking steps to try to ease inflation pressures.
What’s causing inflation?
Fueling the jump in inflation has been a mix of factors resulting from the swift rebound from the pandemic recession: A flood of government stimulus, ultra-low rates engineered by the Fed and supply shortages at factories. Manufacturers have been slowed by heavier-than-expected customer demand, COVID-related shutdowns and overwhelmed ports and freight yards.
Employers, struggling with worker shortages, have also been raising pay, and many of them have boosted prices to offset their higher labor costs, thereby adding to inflation. The result has been price jumps for goods ranging from food and used vehicles to electronics, household furnishings and rental cars. The average price of a used vehicle rocketed nearly 28% from November 2020 to last month — to a record $29,011, according to data compiled by Edmunds.com.
The acceleration of prices, which began once the pandemic hit as Americans stuck at home flooded factories with orders for goods, has spread to services, from apartment rents and restaurant meals to medical services and entertainment. Even some retailers that built their businesses around the allure of ultra-low prices have begun boosting them.
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Over the past 12 months, the costs paid by a typical American family have surged by roughly $4,000, according to calculations by Jason Furman, a Harvard economist and former Obama White House aide.
Though Americans’ overall income has also increased since the pandemic, a new poll found that far more people are noticing higher inflation than higher wages. Two-thirds say their household costs have risen since the pandemic, compared with only about a quarter who say their incomes have increased, according to the poll by The Associated Press-NORC Center for Public Affairs Research.
American consumers concerned about price hikes
Among them is Karyn Dixon, who received a raise this year that hasn’t come close to covering her higher expenses. Dixon, 55, works as a materials handler at a warehouse near her home not far from Knoxville, Tennessee.
Like many companies in recent months, her employer raised workers’ pay – in her case by $1.75 an hour. Yet that’s hardly enough to keep pace with higher health insurance costs and costlier food and gas.
Pricier gas “puts a damper on things, especially when you live in a rural area,” Dixon said. “If we need anything important, we have to travel to the next town over, or Knoxville. Our options are limited.”
“There really hasn’t been much of a benefit from it,” she said of the raise. “You make the extra money, but you turn around and have to pay more for food and gas, just so you can get to work.
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James Lawson, who runs a pastry business in Stockbridge, Massachusetts, says skyrocketing food prices have forced him to reduce the number of croissants and wedding cakes he makes. Prices for his basic ingredients have spiked an average of 25% in the past six months, and Lawson says he can pass only some of the additional costs on to his customers. His business is down 30% to 40% from a year ago.
“It’s stressful,” Lawson said. “There are nights you don’t sleep. I think it’s going to get worse before it gets better.”
Lawson used to buy 100 pounds of Kerry Gold butter for $300 for his business. Now, he said, it costs him $450 to $475. And he feels he can’t raise prices for his desserts enough to make up for his own higher expenses. So he’s had to absorb much of the cost himself, which means cutting back on his own purchases of food and clothing.
“Instead of buying a gallon, you buy a quart and see how long that lasts,” Lawson said. “And then you don’t spend as much on your food.”
Stew Leonard Jr., who is president and CEO of a family-owned supermarket chain based in Connecticut and New York founded by his father, said that by sharing his higher costs with his suppliers, he’s managing to avoid raising prices drastically on his customers.
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“We are absorbing a lot of costs,” Leonard said. “We are trying to hold our prices low, and we will get through it and see where it goes. It’s a very erratic market right now.”
His chain is avoiding raising prices for such staples as milk, butter and eggs. But it’s charging more for more discretionary items like lobster and filet mignon. A pound of lobster has gone from $8 to $11.
Though some of Leonard’s customers are still buying those pricier items, lower-income shoppers are trading down from beef to chicken and from blueberries to bananas.
Inflation lasting longer than expected
Outside the U.S., too, surging inflation is squeezing households and businesses. In Europe, energy costs have driven up consumer prices to the highest level since the euro launched more than 20 years ago. Annual inflation in the 19 countries that use the euro hit 4.9% in November, according to the European Union’s statistics agency. Inflation has gone much higher in some other European countries, with Poland close to 8%, Lithuania above 9% and Turkey at an eye-popping 21%.
For American consumers, the 6.8% jump in inflation for the 12 months that ended in November was the largest year-over-year increase since a 7.1% surge for the year ending in June 1982. That spike occurred at a time when the Federal Reserve had driven up interest rates to double digits in its effort to stem runaway inflation triggered by the oil price shocks of the 1970s.
The persistence of high inflation has surprised the Fed, whose chair, Jerome Powell, had for months characterized inflation as only “transitory,” a short-term consequence of bottlenecked supply chains. Two weeks ago, though, Powell signaled a shift, implicitly acknowledging that high inflation has endured longer than he expected. He suggested that the Fed will likely act more quickly to phase out its ultra-low-rate policies than it had previously planned.
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Doing so would put the Fed on a path to begin raising its key short-term interest rate as early as the first half of next year. That rate has been pegged at nearly zero since March 2020, when the coronavirus sent the economy into a deep recession. Borrowing rates would rise for some consumer and business loans.
Financial markets, which had largely anticipated Friday’s inflation figures, took them in stride. Treasury yields and stock prices held relatively steady, while a measure of fear on Wall Street eased. Russell Price, chief economist at Ameriprise, said the market response suggests that investors have become accepting of the reality that the Fed will accelerate its pullback of the emergency economic aid it supplied after the pandemic.
Speaking at the White House, Biden said of the inflation report, “I think it’s the peak of the crisis, and I think you’ll see a change sooner and more rapidly than most people think” to more moderate price increases.
D’Innocenzio reported from New York. AP Writers Josh Boak and Christopher Rugaber in Washington, Tom Krisher in Detroit and Stan Choe in New York contributed to this report.