Pandemic-Related Supply Chain Shortages Result in Higher Prices for Consumers

Recent data from the Bureau of Labor and Statistics has confirmed what many consumers have already recognized at the cash register: Prices continue to rise for goods and services.

7.9% increase in Consumer Price Index Feb. 2021-2022

From February 2021 to February 2022, the Consumer Price Index for All Urban Consumers (CPI-U) rose by 7.9%—the largest 12-month change since January 1982. . In other words, consumers are paying 7.9% more for goods and services than they were a year ago.

What’s behind these sharp price increases? Basic economics of supply and demand. This balance was disrupted during the pandemic. As companies struggle to get their supply chain challenges under control, it’s likely that this trend will only continue.

Let’s take a closer look.

The Pandemic’s Effect on Supply & Demand—and the Supply Chain

In a free market economy, prices for goods and services hinge on supply and demand.
During the pandemic, the global economy experienced turbulence in both areas, creating supply chain challenges across the board.

Consumer Shifts in Demand

It’s been well documented that consumer demand shifted dramatically during the pandemic. As shelter-in-place and stay-at-home orders turned consumers’ lives upside down, their buying habits followed. Spending swung from services to goods. Those items especially suited to an uncertain life at home flew off the shelves, including shelf-stable and frozen foods. Athleisure sales rose by 84%.

Additionally, online ordering exploded in popularity, bogging down order systems, fulfillment operations, and deliveries.

Manufacturers and retailers alike struggled to keep up with this massive disruption in consumer demand, all while trying to solve problems on the other side of the equation.

Supply-Side Issues

The pandemic created enormous pressure on the supply side. Manufacturers and retailers struggled to get goods in consumers’ hands. Among some of the common themes were:

Labor Shortages

COVID-19 wreaked havoc on the global workforce. Some operations shut down voluntarily. Others were forced to close due to outbreaks. Still others reduced operations and increased social distancing in order to protect workers—all of which meant a considerable decrease in productivity and output. Operations that tried to conduct business as (mostly) usual offered hazard pay to those willing to work, which meant higher labor costs.

And then the Great Resignation swept in. More than 33 million Americans left their jobs from Spring 2021 onward. Some have moved on to other higher-paying jobs. Others, like retirees and stay-at-home parents, have left the workforce for good.

In summary, since the start of the pandemic, labor has been harder to come by. When companies can hire, they’ve often had to pay more than they did pre-pandemic. Together, all of these factors put a damper on both productivity and profitability.

Raw Materials

Those same themes of lower productivity and profitability also plagued manufacturers in sourcing raw materials. Supply chain challenges made it both more difficult to secure raw materials—and more expensive.

Even large manufacturers with significant buying power—like General Motors, 3M, and Boeing—have experienced supply chain challenges around raw materials. By and large, these organizations reportedly plan on passing on some of the cost to their customers, which will ultimately ripple down to consumers. For example, as a result of increased costs in the aluminum and steel markets, Harley Davidson instituted a 2% surcharge last year to recoup some of their costs.

Freight & Delivery Costs

Finally, as companies have attempted to move both raw materials and finished goods globally, they’ve been stymied by high costs and tight capacity across all modes of freight transportation.

In other words, freight is moving slowly—when it’s moving at all—and it’s costing manufacturers more to move it. This means higher inventory carrying costs, bigger freight bills, and tighter cash flow—not to mention the consumers impatiently waiting on the other end to receive their orders.

In summary, the pandemic unsettled the supply side just as much—if not more—than the demand side. Ultimately, supply chains simply couldn’t keep up.

The results? High demand and low supply—a textbook case for higher prices. Tack on the fact that supply chain challenges also created significant costs for companies, and it’s easy to understand the root causes for the higher prices we’re seeing today.

With all of this in mind, let’s take a deeper dive into the recent Consumer Price Index data from the Bureau of Labor Statistics. After all, although there’s been an overall increase of 7.9% in the index, some areas have risen faster than others.

The Consumer Price Index: Where Were Consumers Hit the Hardest?

The Most Volatile Sectors of the CPI

The February 2022 Consumer Price Index for All Urban Consumers (CPI-U) reported high increases in categories like used cars and trucks; gasoline; and meats, poultry, fish, and eggs. Airline fares (12.7%) were also near the top of the list.

Changes in CPI-U from February 2021-2022

41.2% – Used Cars & Trucks

38.0% – Gasoline

13.0% – Meats, poultry, fish, and eggs

A number of other categories also saw big increases, including:

New Vehicles

12.4% increase in Consumer Price Index Feb. 2021-2022

As the automotive industry continues to struggle with its semiconductor shortage, prices will continue to rise. Although 42% of consumers were willing to pay above MSRP in April 2021, that number has started to decline. Instead, almost 48% of consumers said in late 2021 that they’d put off a car purchase.

That may mean slower sales for automakers. If demand continues to wane, it could also mean downward price pressures in coming months.

Food: At Home

8.6% increase in Consumer Price Index Feb. 2021-2022

The cost of eating food at home also saw a significant increase of 8.6% from February 2021-February 2022. As you might guess, the jump in meats, poultry, eggs, and fish was a major contributor. Within this category, the cost of beef played a role as it rose by 16.2%.

Like many industries, the meatpacking industry struggled during the pandemic. Many factories were forced to shut down due to outbreaks. Additionally, the industry has struggled to find workers, all of which is likely contributing to these price hikes.

Interestingly, the cost of eating food away from home only rose 6.8%. However, that rise still represents the largest 12-month increase since December 1981.

Clothing

6.6% increase in Consumer Price Index Feb. 2021-2022

In the apparel industry, consumers are seeing prices 6.6% higher than a year ago. The industry has seen significant impact from the pandemic, both in the realms of supply and demand. Pandemic demand for loungewear and athleisure wear caught the industry by surprise. Additionally, retailers have struggled to keep manufacturing operations moving during the pandemic, with a number of overseas factories shutting down due to COVID-19. Finally, even when finished goods were available, clothing retailers faced freight challenges in moving goods out of Asia—tight capacity, slow transit times, and high costs.

As a result, it’s easy to see how pandemic-related supply chain issues have contributed to the price increases in this category.

Will These Price Increases Be Temporary?

February’s CPI-U news wasn’t particularly good news for consumers. February’s overall increase of 7.9% represented a 0.4% rise from the January figure (7.5%). In other words, prices are continuing to rise.

Some experts remain hopeful that these increases are largely temporary. Once many of these supply chain problems are solved, they argue, prices will drop toward something resembling normal. Considering that consumers were also hit hard by significant cost increases in housing and energy, many hope that this will be the case.

Similarly, many companies also hope for a resolution to their supply chain woes. All of these challenges—including unpredictable cargo transit times, higher freight costs, capital tied up in inventory that’s sitting in containers, problems sourcing raw materials—make doing business difficult.

Ultimately, finding resolutions to global supply chain issues will benefit everyone involved in the global economy—manufacturers, retailers, and consumers alike.

Struggling with freight challenges in this environment? Our experts can help. Just request a complimentary consultation to get started. Together, we’ll take a holistic look at your own supply chain and help you operate effectively amidst today’s challenges.