It goes without saying that the bottlenecks above are going to have inflationary effects, but their impact will vary by region and sector. Those that experienced faster recoveries in demand, such as the US, have generally witnessed higher consumer inflationary pressure, while those where the domestic demand recovery has lagged, such as China, are still registering relatively subdued price rises. Manufacturing hubs that mainly import raw materials have seen a more rapid surge in producer price index inflation.
But will these effects be temporary? We believe the risk is skewed towards more persistent inflationary pressures, for the developed world at least. Raw material shortages and logistics bottlenecks may ease in 2022, when demand normalises and more countries reopen. Weather-related disruption to energy supplies should also ease sooner rather than later.
However, increasing semiconductor production and shipping capacity to accommodate structurally higher demand may take 1–2 years. The realignment of manufacturing supply chains and labour shortages may last even longer. These supply shortages may feed into higher prices for a wider range of goods and services, pushing up core inflation in the medium term.
Over the longer run, a shift in manufacturers’ strategies to enhance supply chain resilience by building “just in case” rather than “just in time” supply chains may lead to structurally higher production costs and inflation, although this should be a gradual process. What’s more, geopolitical changes that began prior to the pandemic, including Brexit and US-China trade tensions, might also be drivers of inflation over the long term.