Supply Chain and Customer Service Shortages: The Real Drivers of Inflation

Economic Policy Brief #126 | By: Rosalind Gottfried | October 17, 2021

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Policy Summary

There are some indications that the economy is strong.  The US economy is expected to grow at 6% this year and fall to 3.9% for 2022, a greater rate than for most years since the turn of the century.  Economists are predicting a steady expansion of the economy for the second half of 2021.  The unemployment rate is under 5%, marking only 17 months to recover that rate since the pandemic started.  Unemployment is currently at 4.8% which is down from 5.2% in August.  In the previous recovery from the global economic crisis, it took 6.5 years after the official end of the recession to reach a level of less than 5%.  Economists consider this good news and they are optimistic within limits, watching the issues of Biden’s ability to address long term increases in the debt ceiling and to pass an aggressive “rebuild America” infrastructure plan.

So what is the issue which can be viewed as worrisome?  Inflation, which is high, is only one measure of the costs to consumers.  Some economists are referring to the “shadow economy,” where unmeasurable aspects of services are deteriorating and reducing the satisfaction of consumers even when the prices are stable.  They suggest that the measure of inflation cannot be limited to physical measures which, at any rate, are also hard to measure in that an item may have a price increase but it may also have improved functionality.  Think of computer programs with less “bugs” and/or products with better carpentry or glass or other elements.  The consumer price index captures only 237 of 273 components of major services; evidence points to many measures of customer dissatisfaction.  Surveys of customer satisfaction in 60,000 restaurants showed a drop of 4.2% in satisfaction regarding cleanliness of tables, floors and restrooms.  Even among highest rated retailers, consumers are facing long waits for customer service representatives and long waits for major house items such as windows, appliances, and furniture.

Shortages are jeopardizing the continuing health of the economy.  There are back ups of container ships in major ports such as southern California and Savannah GA. The flow of goods is stymied by lack of port space and a scarcity of truckers.  Merchandise for major retailers is being shipped to outer lying warehouses and being moved by the retailers privately hiring help; this is not an alternative readily available to smaller retailers.  Auto plants are idle as factories wait for semi-conductors to be delivered.  Restaurants and other services are cutting back hours for lack of workers.  Economists say the issue of the late pandemic era is one of pent-up demand and a shortage of supplies and workers.   This is a different story than in the last economic crisis where demand was low and the availability of workers and productivity was high and the mechanisms to address it are elusive.

Policy Analysis

The global economy is experiencing great demands for physical goods which will continue to put pressure on supply chains and transporting goods which could lead to an interruption in economic growth.

The increase in the debt ceiling is also seen as a crucial mechanism for assuring the solidity of the economy and the administration must assure that there is continued leverage after the early December deadline runs out.

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