David Maloney, Editorial Director, CSCMP’s Supply Chain Quarterly 00:02
The Covid-19 pandemic showed us just how vulnerable supply chains are. Today we face many threats: shipping delays, a lack of workers, failing infrastructure, transportation rates that are out of control, cybersecurity threats, and of course, a worldwide pandemic that is still very much with us. But with each of these threats comes opportunities. Welcome to this limited podcast series from CSCMP’s Supply Chain Quarterly, the Top 10 Supply Chain Threats. Today we focus on the threat of inflation and economic uncertainty. Here is your moderator for this segment, Supply Chain Quarterly’s executive editor, Susan Lacefield.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 00:51
Hello, and welcome. With us today is Paul Bingham, who is the director of transportation consulting at the analyst firm IHS Markit. Paul, thank you for taking some time out of your day to talk to us.
Paul Bingham, Director of Transportation Consulting, IHS Markit 01:03
Great to be here, Susan.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 01:04
Great. So, many of the risks that supply chain professionals have been grappling with this year are not necessarily new, they're just been intensified by the pandemic. But inflation is something that most supply chain professionals haven't had to deal with for some time. So to help our listeners out, maybe heading into the new year, can you give us an idea of what we might be seeing in terms of inflation?
Paul Bingham, Director of Transportation Consulting, IHS Markit 01:30
Well, yeah, this is an incredibly important topic. Inflation has reared its head in this this year, 2021, more so than in most of all of our careers, almost, unless you've been working since the 1970s. As far as supply chains go, it certainly reflects the supply and demand conditions that we've seen. There was a discussion earlier this year of inflation being transitory, meaning it was going to go away by now. Well, in fact, we haven't seen that, and we have been advising this year that there were elements of this inflation which were a reflection of permanent shifts, and that are unlikely to reverse themselves entirely. However, there are elements of the inflation in 2021 that our company does view as, you could characterize it as transitory. An example of that is in energy prices, where we've seen quite a runup—actually, a dramatic runup, even more than we had forecast by this fourth quarter for global crude oil prices, and we've certainly seen it in terms of the pump price of motor gasoline and diesel in the United States. So, the forecast for the year is inflation running for our estimate for the entire[ty] of the calendar year is 4.6%, which is record high growth of inflation looking back over decades for the United States. And that same Consumer Price Index, though we're forecasting, because of some elements of it that we do view is transitory, falling back in 2022 to 3.7%. Now, that is still far above the Federal Reserve Board's 2% target, so we're still talking a high inflation environment from that perspective, but the trend is one that's downward. And the reasons for that include some of those elements that we do view as transitory, such as used vehicle prices that have exploded in 2021 because of the shortage in the chips, which has restricted production such that new motor vehicles have not been able to be manufactured anywhere near where the demand has been running. That's an example where, as the supply catches up, as those fab plants are operating and the chips are made available to the manufacturers and new vehicles are able to be produced, which then meets the demand, we'll see those new those used car and use the truck prices falling. And that's just one example. There's some other supply chain bottlenecks situations in the economy that we view as resolving themselves—maybe not quickly, but happening in 2022, such that overall the trend will be positive in terms of a reduction in inflation. But we're not going back to 2%, and not for a while.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 04:04
Okay, so some semi-good news out there, then, that what we're seeing right now will soften a bit.
Paul Bingham, Director of Transportation Consulting, IHS Markit 04:11
Yeah.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 04:12
So, what may be some of the repercussions of this inflation that's still high for supply chain managers?
Paul Bingham, Director of Transportation Consulting, IHS Markit 04:21
In 2022, the transportation and logistics side of supply chain management responsibility is still going to be facing significant inflation. The rate of increase will decline compared to 2021, but the cost of freight transport, the cost of warehousing, and so forth are still going to be elevated. Some of that is tied to the labor input costs, where wages tend to go up and they don't tend to go down again once they've ratcheted up, and that's going to be true for dockworkers, for truck drivers, and some other key elements of supply chain transportation and logistics costs. Some of the procurement costs, in terms of raw materials and supplies, some of those are going to see reductions in some areas in 2022, but not, perhaps, down back to the levels that we saw, say, before we got into the recovery from the pandemic in the summer of 2020. That implies some necessary planning for elevated costs that may squeeze budgets and perhaps have managers tried to pay attention to where they should try to lock in rates or where they should try to, perhaps, more focus on short-term contracting and allow some rates and some costs to decline later on into 2022 as inflation eases.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 05:35
Fantastic, thank you. So, you had mentioned that earlier this year, there was some feeling among many economists that the inflation would be transitory. You know, maybe maybe IHS Markit was not seeing that, but what were we missing when we thought that it was going to be transitory?
Paul Bingham, Director of Transportation Consulting, IHS Markit 05:54
Well, I think it was an overreaction to some of the observations of where price increases had happened. So, for example, we had seen record runups, early on, of lumber prices, because of an inadequate supply when demand came back in 2020. Those got to, you know, historic high record rates, and then some of those came down relatively quickly once some of the production came back on stream and some of the transportation was actually start—able to start serving end markets. That has continued through the pattern for a number of materials, but not all of them, and certainly not in in petroleum-based energy costs or natural gas energy costs during 2021. And so, that transitory nature of overall inflation, I think, got extrapolated way beyond where its impact really ends up in terms of what contributes to overall inflation. But I don't want to overstate it on the other side of it, that we shouldn't then react too much on the other side and say, Well, none of this is transitory and that we're going to have to be living with this 6% CPI on into the future. By no means is that the situation. We believe that inflation does have some of those transitory elements, so that the rate of inflation is going to be reduced, but it will still be running ahead of what, really, any supply chain managers are comfortable with, or even what they've been used to planning around, as we head through 2022. We're talking moving more towards the 2023-to-2025 time period till we get back to a very long-term, say 2%, inflation. And for many of us in the supply chain industry, we're used to inflation running below 2%. The Federal Reserve Board was frustrated for years with almost threats of deflation, so in a 2% inflation outlook, it's even above trend for what we had for a long period of time since the Great Recession running up to the pandemic.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 07:47
Right. So, how has this kind of major change for how we're dealing with, like our worldview, in terms of inflation? How does that affect your planning? What advice would you have for supply chain professionals going forward with their plans?
Paul Bingham, Director of Transportation Consulting, IHS Markit 08:04
Well, they have to pay special attention now to that procurement costing and labor costs—the elements of budget planning, where quantities may not equal the unit price or the unit value as this inflation takes a toll, you know, across the board. And that requires a different perspective than perhaps what they've been accustomed to in terms of budget planning for out years and making decisions about contract periods and contract terms, and making some of those decisions even on inventory management when they get back to somewhat approaching desired levels of inventory-sales ratios, in terms of the carrying cost of those goods as inflation is running higher.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 08:43
Great, thank you. Well, Paul, you have certainly given us a lot of great insight heading into 2022, and we appreciate you spending some time with us today, and we hope to be hearing more from you in the future.
Paul Bingham, Director of Transportation Consulting, IHS Markit 08:56
Thank you, Susan. I really appreciate the opportunity and we hope to talk to you again in the future. Thank you. Bye now.
Susan Lacefield, Executive Editor, Supply Chain Quarterly 09:02
Thanks again, we've been talking with Paul Bingham who is the director of transportation consulting at IHS Markit, and he's been providing us with some great insights on inflation and the economy ahead. Thank you for joining us for this podcast from CSCMP’s Supply Chain Quarterly, the Top 10 Supply Chain Threats. We encourage you to subscribe wherever you get your podcasts.