Supply Shortages and Inflation

As we prepare for another inflation report (August CPI will be released on September 14), here are four questions that have been top of mind for readers, listeners, and viewers about supply shortages that are contributing to price increases.

Question: I understand that there was a period early in COVID when supplies for paper towels, toilet paper and disinfectant were hard to find, but what’s going on now? Why are some products still hard to come by?

Answer: Amid the pandemic, shipping containers have been stranded in places where there is not enough product to fill them; and alternatively, empty containers are not in the ports where supply can be refreshed and loaded. The shortage has caused prices to triple the cost to ship product.

In addition, decisions that suppliers made early in the pandemic are still playing out. For example, chipmakers that had limited production facilities, focused their time and energy on consumer electronics. Some car manufacturers canceled their orders for chips because they had limited production capabilities and they didn’t expect demand for cars and trucks to surge, which caught them off-guard.

Finally, in the pre-pandemic era, companies loved the idea that they could maintain skinny inventories, which allowed them to be more profitable. The COVID era has caused a major rethink of that practice because many firms simply can’t deliver enough product to meet high demand.

Question: We’re planning a big springtime renovation and I’m worried that the prices of everything will be higher. Should we order materials now?

Answer: Building materials have increased by over 19.4% (through July) over the past 12 months so I understand the desire to try to lock in prices. Unfortunately, that would be like trying to time the stock market, which we know does not work.

Here’s how the idea of “getting ahead” could sting. As recently as May, cash lumber prices climbed to a record $1,515, a more than 300% increase from April 2020. Since then, prices have plummeted by almost 7%, to under $400. You sure would be bummed out if you locked in high prices, only to see them tumble.

However, my GC/builder friend Kevin said that if you know that you will need appliances, you should get a jump on orders ASAP, because those shortages are likely to last at least through the end of the year. To get stuff faster, try to be flexible on finishes and features.

Question: I read that product shortages will impact holiday season. Do I really need to get my act together now, even before Halloween???

Answer: Supply chain pressure will make it tougher to find the holiday stuff you want, especially for electronics, toys, seasonal clothing and home furnishings. And if you do find gifts you want, be prepared for 5% to 10% increases. Ditch the last-minute holiday shopping frenzy and start monitoring prices and looking for deals now.

Question: My car is coming off lease shortly, but when I went to the dealership, there were no cars available. What should I do?

Answer: The shortage in semiconductor chips has stalled car and truck production. As a result, dealers have about a third of the inventory available to sell that they carried before the pandemic hit. The dearth of vehicles has cause prices to jump. According to Kelley Blue Book, the average transaction price for a new car in June was over $42,000 and used car prices are also sky-high, averaging over $25,000, and that’s with an average of 68,000 miles on the vehicle, according to Cox Automotive.

If you have a lease that’s coming up, you may want to consider buying it out. Most contracts detail a pre-calculated price, which in the scarcity era of cars, might be a better deal than anything else you could find, if you can even find one.