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Inflation and the Supply Chain: Connecting the Dots

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Over the past year, we’ve all been impacted by the supply chain. Due to shortages of both goods and labor, prices are at an all-time high. After the initial shock back in March of 2020, consumer spending halted. A year later, it redounded – with a vengeance. As the demand for consumer goods skyrocketed, the supply chain has been unable to keep up. In 2021, prices continued to climb, reaching a staggering 6.8% inflation rate in November. While there is much debate whether or not these prices are here to stay, it is inarguable that the supply chain and inflation are related.

What Is Inflation?

Before we can dissect the supply chain’s impact on inflation, it’s important to understand what it is. Simply put, inflation is an increase in prices (of goods and services). The ideal rate of inflation, according to the Federal Reserve, is around 2% a year. Prices have climbed much higher than the prescribed 2%, which is troublesome.

The Cause of Price Surges

It’s no mystery that the pandemic continues to affect the economy. Retailers are raising prices, yet shelves still seem to be empty. Let’s investigate the potential culprits of inflation and what can be done to address it.

Demand on the Rise

In early 2021, prices began to rise and have been steadily climbing since. The surge in prices is a response to consumer demand. As people have been spending more time at home, they’ve decided to take on renovation projects and convert their homes into classrooms, offices, and gyms. In response to these projects, the e-commerce industry has boomed faster than production can keep up with. Warehouses can’t keep their shelves stocked and carriers can’t accommodate deliveries.

Supply Is Sparse

With demand on the rise, the supply chain is severely strained. Between labor shortages, lack of distributors, and delayed container ships, these disruptions continue to worsen. Currently, there are more than 500,000 containers stuck at sea, with an average wait time of 18.5 days. These delays are costly and while the white house has passed a $17 billion plan to help address port issues, the root cause remains unchanged.

Supply Chain Disruptions Cause Inflation

Demand is up. Supply is down. With ongoing supply chain disruptions, retailers are hiking up prices to cover the incurred costs of production and shipping delays. These higher prices are then passed on to consumers (inflation). As long as supply chain problems persist, inflation is unlikely to go away.

Demand Forecasting Is the Solution

Black Friday unofficially kicked off the season of consumerism. As we inch nearer to the holidays, we can expect demand to continue to increase, supply to be limited, and inflation to stick around. One solution for this is to invest in better Demand Forecasting. With more accurate and powerful forecasting abilities, we can work to keep shelves stocked, ultimately reducing prices.

Recurrency uses machine learning and artificial intelligence to make highly preceptive recommendations. Unlike most traditional forecasting, Recurrency’s algorithms have the ability to produce accurate forecasts many months in advance. With better forecasting and more time to plan, distributors can afford longer wait times without negative repercussions. Accurate demand forecasting could help lower inflation. To read more about how to improve your forecasting capabilities, download the whitepaper.