Inflation is Rising and the Costs of Raw Materials are Exploding

I run a small manufacturing business. Every week, another supplier will inform me of a price increase. Inflation is rising.

My suppliers of chemical raw materials are reporting massive shortages and delivering products 2–3 months late. I have been sourcing resins whose price for the last ten years fluctuated between 3.30–3.60 Euros/kg. For June I have been told that the price will be in the Euro 6.50/kg range! A doubling in the cost to produce my products means that I need to pass some of this increase to the prices of my products.

My supplier of packaging products (like cardboard boxes and stretch film) has increased prices by over 15% in the past three months. She blames increases in the cost of paper and plastic packaging.

My supplier of plastic pails has increased his prices by 20–25% this year. He blames increases in the raw material that is used to make PVC.

Metal is also in massive shortage. Any goods that contain metal have seen price increases.

And I bet most of you have noticed that gasoline prices at the pump are pretty high. In fact, in most countries, they have reached 7-year highs.

How does this affect the overall economy?

Many people who are not involved in industrial production think that this will not affect them. They are wrong. Manufacturers have already started increasing their prices to their customers. Slowly the increases will become visible across the board.

For example, when the cost of plastic increases, yogurt manufacturers will need to pay more for plastic cups. He will pass this price on to the grocery store, which will increase the final price on the shelf.

Now forget the yogurt manufacturer, and imagine all the consumer goods that require plastic to be packaged, from processed foods and drinks to kids’ toys. Most of these products will see a price increase.

My local hardware store is reporting that standard electrical tools like drills and grinders are in short supply. Even those prices are on the up. Next time you call a handyman to paint something in your house, you will need to pay more money for the paint and more money for his tools. He will also charge more for his time since everything is more expensive now.

Should we blame Governments trying to pump the economy?

Governments all over the world are trying to restart their economies following the havoc inflicted by Covid. There are two ways to do this: One is to increase government spending through government stimulus plans.

The second method is to get the central banks of your economy to pump money into the economy. They usually use some fancy name like quantitative easing but what they really mean is printing money. This leads to banks giving out more loans and credit. In return, this leads to the money in circulation growing and people believing that they have more money.

Although I have never been a fan of governments intervening in the economy, I cannot blame them for trying to stimulate the economy. Covid has severely damaged economies all over the world. No nation can afford to have high unemployment and millions of people losing their homes. History has shown us that extensive poverty could lead to massive political unrest, anger, and a turn towards extremism.

Many libertarians and bitcoin fans are already blaming these stimulus plans for creating inflation. However, stimulus plans and money printing take 2–3 years to show up in the real economy. For the first year, the stimulus plans will just be absorbing the damage inflicted by Covid. I expect some inflation to show up due to money printing, but this will probably show up in 2023 or 2024.

Then how can we explain these price increases?

There are several factors that are to blame for these across-the-board price increases. I will try to explain them in as simple language as possible:

  • When Covid appeared in the spring of 2020, many producers were stuck with excess stock. They shut down their factories and tried to unload their stock at very low prices. They were hesitant in re-opening as they were not sure when global demand would pick up again.
  • At the end of 2020, economies in Asia seemed to have Covid under control and experienced a massive surge in demand for goods. Meanwhile, Europe and North America were back into lockdown
  • This shift in demand led to problems in the global supply chain. The world’s no.1 exporter, China, reported a shortage in shipping containers used to load finished goods. This led to an explosion in the cost of shipping from China to overseas. In some cases, the increase was fivefold! The additional increases in the price of oil are not helping.
  • Manufacturers of raw materials started passing these increases in shipping costs into their products.
  • Shipping delays led to raw material shortages all over the world. Many ports had long backlogs of ships waiting to unload their goods.
  • As one economy after the other starts coming out of lockdown, their factories began placing orders for raw materials. However, there was already a backlog of undelivered orders and shortages in shipping.
  • As factories become desperate for supplies, prices start rising everywhere as global supply cannot meet global demand. The market for raw materials becomes one big auction, and the highest bidder gets the order.

So, where does that leave us?

In the next months, price increases will start becoming more visible to consumers. My local restaurant has already increased prices. The cost of smartphones, laptops and electronic devices will also be affected.

It will probably take a few months for global supply to catch up with global demand. Until then, prices will continue increasing, and we cannot yet predict if these prices will go back to their average historical levels.

As stimulus money pours in, consumers will not pay attention to the price increases thinking they have got money. But eventually, inflation will catch up to us. We will realize that Covid was not just a one-year blip for our economies.

Inflation is rising, and right now, it has been triggered by an excess demand vs. a shortage of supplies problem.

We are venturing into unchartered waters, as there are very few historical comparisons. Personally, I see a few boom years ahead that will be brought to a halt by sustained inflation.

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