Covid has disrupted supply chains in two major ways: surging demand for imported consumer goods in the west, and a decline in workers required to maintain and operate these supply chains. Over the last twenty years supply chains have relentlessly been pushed towards efficiency with the adoption of Just-In-Time(JIT) inventory management in addition to the integration of global component sources. This Evolution has dramatically increased efficiency but has come at the cost of fragility. Covid constantly flipping the on/off switch on these supply chains has exposed this weakness. Shipping is the nexus of the issue. It usually takes 40 days to transport a container from a factory in China to a store in the US. At the moment it takes 73 days meaning goods ordered today may not arrive by the Holidays. Consequently, price of shipping has jumped. Both the Shanghai Shipping Exchange Containerized Freight and the Baltic Exchange Freightos Container indexes are reading at historic highs. Just recently the port of Los Angeles announced they are going to start running at 24 hours a day to ease the cargo backlog but this won't solve the problem overnight.
We are going to have to start a swear jar for every time we use the word “transitory” but I still believe that over the next 12 months these kinks in the system will work themselves out as economies continue to reopen, vaccines are rolled out, and treatments come online. This might sound like a broken clock, but I think we are approaching the peak in transitory inflation thereafter there will be choppiness with inflation emerging in some areas and disinflation in others which is sure to cause anxiety in the economy. Markets have looked past this inflation because it is still being driven by strong demand. As supply catches up over time and the economy normalizes, inflation should normalize with it. In any case, if inflation proves to be persistent, right now it is ultimately the corporate sector that is facilitating it and the strong demand is allowing high-quality companies to raise prices.
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