It had to happen. While Covid has destroyed our way of life, few predicted how global shutdowns of factories, refineries, and mines could impact prices. As countries recover, rising oil prices that have doubled from November to now, breaching the $70/barrel level, are driving up prices across all sectors.

Indian policymakers can learn from western economies that are slowly returning to normal. In the US, the Consumer Price Index in June showed a 5.4 per cent increase, the largest year-over-year gain since 2008.

Economists classify inflation as being supply-sided — when the world’s factories cannot satisfy demand — or demand-sided — when too much money chases limited supply. The world appears to be fighting inflation on both fronts.

And it is not just oil. As the Work-From-Home formula, so prevalent in the services sector, took hold, a stark truth unfolded: To make physical goods, we need people to go to work, produce, and ship them through the global supply chain. When the pandemic hit, many semiconductor manufacturers shut down. Auto companies idled plants causing the few microchip manufacturers still running to switch production capacity to make more PCs and phones as demand rose for Zoom-driven technologies.

Demand surge

With the production of automobiles and other big-ticket items now coming back, there is too much demand for a limited supply of chips. Intel and other manufacturers have announced new plants, but they won’t start adding to the supply for months. Glenn O'Donnell, Vice-President and Research Director at Forrester Research, says in his blog, “Because demand will remain high and supply will remain constrained, we expect this shortage to last through 2022 and into 2023.”

The result has been a steep increase in semiconductor prices. Chips are used in products ranging from IOT devices to satellites. Refrigerator prices in the US are up 50 per cent and used car prices 40 per cent compared to pre-pandemic levels. A shortage of cars has caused Hertz, Avis, and other chains globally to push rental prices 200-300 per cent higher in some markets. To exacerbate matters, central banks are flooding markets with money, and governments are borrowing and spending trillions of dollars to combat downturns. No one knows when to apply the brakes. The 10-year US Treasury yield is 1.32 per cent. The return on consumer savings bank accounts is practically zero.

There are grim stories on the demand side as well. In North America, where most homes are built from wood, government pandemic cash assistance caused homeowners to engage in do-it-yourself projects. Lumber prices increased, even as sawmills began to shut down. Before the pandemic, lumber was selling at about $350/1,000 footboard. In May, the price in the futures market jumped to $1,250, nearly a four-fold increase for the same quantity of wood. This has had a ripple effect in the vast housing industry. In metro Dallas, prices of new homes skyrocketed, pulling up existing home prices. Buyer frenzy set in. Realtors reported that buyers began to make offers of $75,000 over already-high list prices without even inspecting the home. Sellers had to contend with 50+ bids, most over the asking price; all made on the day that bids were invited.

This is what textbook inflation looks like and it is not pretty.

Of the 10 most-populated countries, life is not back to normal in five (India, Indonesia, Pakistan, Brazil, and Bangladesh). As these economies recover, demand will place even more pressure on already-scarce global supplies. We are looking at a pandemic of high prices for years to come.

The writer is Managing Director, Rao Advisors LLC, Bedford, US

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