Mohamed El-Erian says the supply bottlenecks causing inflation aren’t going away anytime soon

Mohamed El-Erian
  • Mohamed El-Erian said supply bottlenecks will continue in the near term in a CNBC interview on Monday.
  • The chief economic advisor at Allianz criticized the Fed for its lack of “humility” and “open-mindedness.”
  • “These bottlenecks that have to do with raw materials, other inputs, and labor are not going away anytime soon,” El-Erian said.
  • See more stories on Insider’s business page.

Mohamed El-Erian, the chief economic advisor for Allianz and president of Queen’s College, Cambridge, sat down with CNBC on Monday to talk markets and the topic of inflation quickly came up.

El-Erian said that he believes supply bottlenecks causing inflation will persist.

“I’m of the view that these supply disruptions, these bottlenecks that have to do with raw materials, other inputs, and labor are not going away anytime soon,” El-Erian said.

The chief economic advisor for Allianz added that based on conversations he is having with CEOs, there is considerable input pressure from rising commodity prices on corporations that are going to be passed onto the consumer in the form of higher prices.

“The thing I’m hearing most commonly from companies’ CEOs is: we’re having problems securing inputs, and we’re looking to increase prices and wages,” El-Erian said.

In El-Erian’s view, over the short-term, the Fed won’t change its position that inflation is transitory because they have stated they need “unambiguous evidence” of inflation before tapering asset purchases or increasing interest rates.

El-Erian argued the Fed’s conviction that inflation is transitory comes despite evidence from every corner of the market.

He also noted that the University of Michigan’s index of consumer sentiment released last Friday showed a sharp increase in consumers’ expected inflation rate for the next year in May(4.6% compared with 3.4% in April).

The Consumer Price Index posted its largest most month-over-month jump since 2009 in April as well, while “core” inflation jumped the most since 1982.

Further, El-Erian pointed out that the Bank of Canada and the Bank of England have already started to discuss addressing inflation via tapering quantitative easing policies, and said he worries the fed might be “late” to action.

When asked what would happen if the Fed is “late,” El Erian said, “the market may start getting nervous, and then the Fed will have to slam on the breaks. The last thing we need is the Fed slamming on the breaks because experience shows when that happens, we end up with a recession.”

El-Erian went on to criticize the Fed for its lack of humility and open-mindedness in crafting policy.

“Why is it that you can dismiss all this evidence both from the top-down and bottom-up and hold onto a conviction? You should be more open-minded have a bit more humility about the fact that we don’t understand well supply bottlenecks,” El-Erian said.

“Economists typically lag when it comes to supply bottlenecks,” he added.

Read more: Goldman Sachs says these 23 stocks have strong pricing power and rock-solid margins that could protect against soaring inflation

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Can’t find chicken wings, diapers, or a new car? Here’s a list of all the shortages hitting the reopening economy.

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Empty shelves and shoppers at a Target store in Dublin, California, on March 15, 2020.

  • As the US economy increasingly reopens, it is seeing shortages of all sorts of items.
  • If you’ve tried to buy (or rent) a car or eat some chicken wings, you’ve probably noticed.
  • Insider rounded up some of the major supply shortages and why they’re lagging.
  • See more stories on Insider’s business page.
Computer chips

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President Joe Biden holds a semiconductor chip at the White House in Washington, U.S., February 24, 2021.

An ongoing computer-chip shortage has affected cars, iPads, and dog-washing technology alike. Chipmakers like Intel had already seen production issues pre-pandemic, but as with many industries, COVID-19 brought a variety of new supply-chain issues. The chip shortage is a problem for consumers wanting basically anything with a computerized component, which is much of the economy. Take cars as an example.

The semiconductor shortage has hit automakers the hardest. In January, the consulting firm Alix Partners estimated the automotive industry would lose $61 billion in revenue from the shortage this year. As Insider’s Katie Canales reported, demand for chips has gone up as consumers scrambled to buy cars and other technologies that use them.

But as more cars went into production, chip competition went up. Since then, many carmakers have been forced to shut down plants and prioritize which models they produce, while car prices at dealerships have continued to go up.

Last week, Tesla CEO Elon Musk said the semiconductor shortage has caused “insane difficulties” for the electric carmaker. Even Apple — a company that many thought would be able to dodge the shortage after it started making its own high-powered computer chips last year — said it will delay production on its iMac and iPad.

 

Used cars and rental cars

car buying

Buyers are still looking for vehicles, creating a competitive used-car market. As USA Today reported, used-car prices are on the rise as the aforementioned chip shortages affect new-car production, and buyers have turned to older ones instead, while Axios reported the average price of a used car has hit $17,609.

A UBS note estimated that in April, used cars saw their largest monthly price increase in 68 years of tracking, with prices rising between 8.2% and 9.3%.

If you’re looking to rent, you might also be out of luck: Insider’s Brittany Chang reported on the “perfect storm” hitting rental cars right now, with prices surging and demand increasing. Americans are itching to go on vacation this summer, as more people are vaccinated and some restrictions loosen. That’s leading to far more demand — but rental-car companies had sold off parts of their fleets early into the pandemic, leaving fewer cars to go around. 

It’s not all bad news for used-car lovers, though: As USA Today reports, the trade-in market is hot, too, meaning your old car could be worth more right now.

Gas

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A man fills up a car at a filling station.

Industry experts say drivers will face fuel shortages this summer.

Demand for fuel and interest in travel has risen as vaccination rates have increased. Lower gasoline-production rates have also made the commodity more valuable, as OPEC has been slow to curb production cuts. 

Gas prices have skyrocketed in recent months, jumping 22.5% in March from the previous year, according to the US Bureau of Labor Statistics’ Consumer Price Index. Much of the surge in gas prices started with the extreme Texas freeze, which halted a fifth of the country’s oil-refining capacity in its tracks for weeks at a time.

 

Plastics and palm oil

plastics manufacturing

The devastating winter storms in Texas also left their mark on the plastics industry. As Insider’s Natasha Dailey reported, the state is a key plastics exporter — and the storms made many plants, which are difficult to reactivate, press pause.

According to the Financial Times, rising plastic prices have led to an increase in packaging costs. Citing data from Mintec, the Financial Times reported that those costs have increased by nearly 40% from the start of 2020, marking “historic highs.”

Palm oil, which is in a majority of those packaged products, also saw its prices climb, according to the Financial Times. That’s due to yet another labor shortage; the industry had already been contending with finding more sustainable production methods.

Trucking

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A contract port truck driver, Giraldo has seen work dry up as imports slow during the coronavirus outbreak. He gets fewer than four hauls a week, compared with at least 12 in normal times.

The Wall Street Journal reported that increased shipping demand has combined with a lack of drivers and trucks to result in climbing shipping costs. 

In September, Insider’s Rachel Premack reported that pay for truck drivers was on the rise, coming in at “record-smashing levels.” But the pay hike — and increased demand — comes after an exodus of drivers in 2019; Premack reported at the time on what some called a “trucking bloodbath,” as trucking companies saw profits fall, with some even going bankrupt.

Now demand is surging, according to The Journal, and if everything continues as is, that gap could deepen.

Homes and vacation houses

House for sale US
A house’s real estate for sale sign shows the home as being “Under Contract” in Washington, DC, November 19, 2020.

The US was facing a shortage of 3.8 million homes as of April, according to Freddie Mac. Home builders have been struggling to keep up with demand as remote work fuels interest in spacious housing, with house prices rising at their fastest pace in 15 years, The Wall Street Journal reported. Lumber prices are also driving the cost of new homes even higher.

In the past year alone, the median cost of a home in the US shot up 15% from $300,000 in 2019 to $340,000 by the end of 2020, according to data from the National Association of Realtors. That measure does not even begin to account for hot housing markets like Austin, Texas, where the average home went for more than $800,000 in April.

Even vacation-home rentals are at an all-time high. A house in the Hamptons rented for $2 million this summer, and 85% of vacation rentals in popular destinations like Cape Cod, the Outer Banks, and the Jersey Shore are booked through August, according to the rental site VRBO.

Lumber

Lumber

If you’re wondering why the houses around you are getting more expensive, look to their component parts. No, seriously: Lumber prices have soared, and, as Insider’s Ayelet Sheffey and Libertina Brandt reported, builders are even increasing house prices in an attempt to offset demand.

It’s due to another pandemic disruption, as lumber mills were forced to temporarily close for safety concerns. When they reopened, they couldn’t keep up with a scorching-hot housing market, goosed by a work-from-home economy, record low mortgage rates, and the need for personal space during the pandemic.

According to an April analysis from the National Association of Home Builders, soaring lumber prices added $36,000 to the cost of a new home. Lumber prices “remain stubbornly high,” according to the report, due to mills shutting down, unexpected demand from big-box retail and DIY-ers, and tariffs imposed on Canadian lumber.

Household products like toilet paper and tampons

Stockpiling toilet paper

Many household goods including toilet paper, diapers, and tampons are also facing supply problems.

One of the biggest producers of the pulp used to create toilet paper told Bloomberg that port delays and high shipping costs are causing companies to push delivery dates back months. 

Shortages and shipping delays are causing many companies to hike prices. Last month, Proctor & Gamble said it would raise prices for baby-care and feminine-care products, as well as adult diapers to combat shortages and shipping costs. The same week, Kimberly Clark hiked the price of its Huggies diapers and Scott toilet paper. 

Furniture

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La-Z-Boy store

The work-from-home lifestyle helped the furniture industry boom but to such an extent that customers are seeing delivery dates that are months out.

In February, La-Z-Boy executives said customers could expect delivery dates that are five to nine months out from their order dates. Other furniture companies like Kasala, a Seattle-based chain, said they don’t expect to get furniture parts until at least December.

Many US furniture stores use parts from China. The global shipping-container shortage, as well as delays at key ports in Southern California have not only made the goods more expensive, but have also pushed back delivery dates by several months.

The furniture shortage has been exacerbated by a spike in homeownership, as the number of available and unsold homes sits at record lows. In other words, a lot of new homeowners are waiting a long time for their new living-room sets.

Chicken

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If you’ve been having trouble finding chicken wings, you’re not alone: They’re hard to come by as supply tightens. Insider’s Avery Hartmans reported that chicken-wing supply is dwindling while prices rise. It’s due in part to increased demand and shortages caused by devastating winter storms in Texas.

The Washington Post reported that shortages go beyond just wings, with all chicken harder to get ahold of. One phenomenon The Post notes: Fried chicken sandwiches, which have gained viral popularity in the past few years. McDonald’s has even launched its own. Insider’s Mary Meisenzahl reported that the KFC Nashville hot chicken has been so popular on TikTok that the chain is running out of the hot sauce for it.

Bacon and hot dogs

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Bacon and hot dogs will likely be in short supply this summer.

The pig shortage dates back to the onset of COVID-19 and outbreaks in at least 167 meat-processing plants forcing almost 40 plants to close as of June 2020. As vaccination rates pick up and people prepare for summer vacations and cookouts, analysts told Insider’s Natasha Dailey demand will outstrip supply.

With pork companies still struggling to overcome lower production rates in 2020, the matter only intensified when high instances of disease hit the hog population this past winter.

 

Imported foods like cheese, coffee, and olive oil

coffee pot

Imported goods including coffee, cheese, seafood, and olive oil are facing months of shipping delays.

Dozens of mega-containers ships are waiting to dock off the coast of Los Angeles. The site accounts for about one-third of US imports, and the backlog is causing ships to wait weeks to dock and unload.

Some companies are already seeing the impact on their shelves. In March, Costco said its supplies of cheese, seafood, and olive oil were running low. 

General Mills said it has been forced to raise prices due to the delays increased shipping costs.  Coca-Cola also raised prices to combat the supply-chain crunch. Neither company specified which products would be affected.

Coffee has also been hit by delays, Bloomberg reported in March. Peet’s and JM Smucker, the brands behind Folgers and Dunkin’ coffee, have said they’re facing rising costs. Reuters reported that in February, port delays pushed coffee prices to their highest point in more than a year.

 

 

 

Chlorine

pool cleaning
Chlorine can kill germs, but alcohol is more effective.

This summer pool owners will see the worst chlorine shortage in US history, according to CNBC.

Supplies of the chemical have been strained since a fire at the chlorine manufacturer BioLab in Louisiana in September. The price for chlorine used in pools has nearly doubled this past year and is expected to rise even more to meet demand this summer.

Insider’s Annabelle Williams reported that pool owners could help avoid the shortage by resorting to saltwater pools.

Corn

corn maze

Corn is a key crop for many products, including fuel and different foods. As supply concerns loom, corn prices are popping off, according to Axios

There’s a few reasons that demand is so high: After an outbreak of swine fever in China, pig herds were “decimated,” according to Axios, leading to huge corn demand in China. That spike in demand is coupled with corn crops in Brazil and Argentina experiencing both bad weather and pandemic-related labor shortages.

Now corn prices are on a record-setting clip, rising by 16% in April alone. 

And, as Fortune reported, there could be a domestic supply issue too. Droughts and a rough winter are both concerning — and if American crops can’t fill in the gaps, prices could rise even more.

 

Labor

now hiring

Finally, a commodity unlike all the others is in surprisingly short supply: workers.

Major labor shortages are hitting businesses across America. As Insider’s Kate Taylor reported, chains like Dunkin’ and Starbucks are struggling to find workers — leading to reduced hours and hesitance on opening indoor dining back up.

There’s a few possible reasons that unemployed workers are opting not to return, according to Insider’s Ayelet Sheffey. They include workers making more on unemployment benefits than in their prior work as well as continued concerns over COVID-19 and the need to provide childcare at home.

As Insider previously reported, female tipped workers experienced lower tips and increased harassment during the pandemic.  

One potential solution for ending this shortage, according to Taylor? Paying workers more.

Read the original article on Business Insider

Experts lay out how the chaos caused by pandemic-era panic buying could revolutionize our global supply chain

Stockpiling toilet paper
In the US, one of the earliest stories of the pandemic was the toilet paper shortage.

A year-long struggle with the COVID-19 pandemic has brought more headlines than we as a society – as well as the people writing those headlines – can really handle. There’s been speculation, sadness, chaos, fear, isolation, data, and graphs. So many graphs.

But one of the earliest headlines of the pandemic wasn’t about any of that. It was about supply, and the supply of one product in particular: toilet paper.

When Insider mentioned the great toilet paper crisis of 2020 in a virtual roundtable with Hannah Kain, founder and CEO of California-headquartered supply chain management supplier ALOM Technologies, she laughed.

“Yes, we can talk about the toilet paper,” she said. “I never thought I would be interviewed so much about toilet paper.”

clorox lysol store shelves
A shopper at a Target store in Brooklyn reaches for disinfectant wipes in March 2020.

When much of the US shifted to quarantine overnight last March, the world’s supply chain was forced into the spotlight. Suddenly, we were ordering more online: our groceries, our home office setups, our bread ingredients, our puzzles. When we did face this new, mysterious virus to go into a store, we were met with empty shelves and freshly printed signs telling us we couldn’t buy more than two jugs of milk. Sales of toilet paper in the US shot up 845%, demand for Clorox products spiked by 500%, and treadmill sales more than doubled.

As we depended on our supply chain more, we criticized it more. After all, how hard could it be to just make some more toilet paper?

As consumers, we focused on the supply side of the equation. But Kain said for the professionals, supply problems haven’t been the story for much of the pandemic – demand shift has.

“Demand shifted so dramatically, sometimes 50% or 100% compared to forecast,” Kain said. “The supply really got constrained, right? If the demand had not shifted, the supply side would have been difficult, but it would still have been flowing really, really well.

“Many [journalists] say, ‘But why don’t they just make more?’ I’m like, ‘Well, guess what, you need equipment to make more toilet tissue, and where do you get the equipment from?’ A lot of times, from China. But even if you use a local equipment maker, they need spare parts from all over the world and it just takes time to deploy it.”

Toilet paper production
The US saw demand spikes as the pandemic took hold, and toilet paper sales shot up 845%.

Kain said demand changed in two important ways: which products people bought and, as people shifted even more of their purchasing online, which channels they bought them through.

Mei Yee Pang, the Singapore-based head of DHL Asia Pacific Innovation, saw similar patterns, illustrating a common theme of the pandemic: how intertwined supply chains are, for better and for worse.

“Supply chains today are so global, you see pretty much the same phenomena everywhere we go,” Pang told Insider. “We too had our toilet paper issues. There was, at some point in time, a global shortage of glassware because everybody started making jams at home and needed glass jars.

“So we do see very interesting demand shapes, and a lot of them, looking back, are something that we can expect. That’s where big data potentially in the future can come in more, better forecasting some of these effects that we normally wouldn’t have expected.”

costco cart toilet paper kirkland
The production of toilet paper came into the spotlight during the shortages, with many asking why companies couldn’t just make more. Experts told Insider it wasn’t that easy.

Changing demand isn’t the only issue the pandemic highlighted. More online ordering didn’t just mean more convenience for the buyer – it meant more waste, too.

“Every time I receive a parcel, I feel bad about it because I’m contributing to waste,” Pang said. “I think this is something that needs to change. We can’t be sending individual shipments using partially utilized vehicles to send stuff around to individual homes.

“It’s not easy, but I think as we go more and more from a less than 20% e-commerce channel to now, some companies are having that switch around to e-commerce as a major channel, we are going to see a lot of waste coming into play and it’s not sustainable.”

Cargo planes
As many places shifted to quarantine, consumers’ online ordering habits expanded.

Kain thinks the switch to e-commerce is here to stay, but said there’s “no easy solution” to making the change more sustainable from a packaging perspective.

“If we go to things like consumer electronics, everything was packaged for the retail shelves,” Kain said. “Maybe now you have a shippable box, and you don’t have a box inside a box.

“We are a little bit in a tough spot right now because recycling and return packaging is of course a big issue because of the risk of infection. I think this is something that we’ve got to develop over time, but I do think that the big carriers are going to come out with support in this area.”

Mailed packages on front porch
A stack of delivered packages and boxes sit outside a front door.

Pang, whose employer DHL is one of those big carriers with more than 350,000 employees worldwide, said analytics will help.

“In our organization, we start looking at how we can help our customers look at packaging and use data information to optimize the way we pack, the way we pelletize,” Pang said. “Every small bit counts to really reducing our footprint, and at the same time, lowers cost. So what’s not to like about this sort of solution?”

Peter Evans, CEO of the UK-based sustainable supply chain technology company Orderly, told Insider his company’s main product is something called a “scorecard.” Its goals include reducing waste of both products and packaging.

“It rates everyone who manages supply chain operations, from someone in a warehouse to the CEO, on a scale of zero to five,” Evans said. “Zero being ‘You’re wrecking the planet and you’re wrecking your business,’ five being ‘You’re really making some decent change here.’ We use AI against all this data we pull in to give each person two recommendations each week on what they can do to provide the biggest, most sustainable impact to their supply chain.

“For us, it’s changing people’s mindsets on an individual level, showing them what can be done in the world as well – what can create the biggest benefit.”

ups employee packages delivery
A UPS employee delivers packages.

Kain said that’s important, both in terms of sustainability and social responsibility, as more people think about their relationships with companies.

“Corporate social responsibility has become way more important for decision makers,” Kain said. “It’s driven by consumers. We want companies to be in sync with our values. We don’t want them to be out of sync.

“For instance, early in the pandemic, there was a survey done in the US showing 87% of consumers did not want to buy product from companies that did not keep their workers safe. We’ve never seen sentiments like this before, and it’s very healthy and good. It’s forcing the corporations to think differently about their supply chain in a very healthy manner. In any crisis, there’s a silver lining, and I think that’s it.”

amazon package logo warehouse
A worker loads a truck with packages at an Amazon packaging center in Germany.

Another silver lining might be that when or if this kind of global crisis happens again, the supply chain will be a bit more prepared for what’s coming – thanks, in part, to how big of a spotlight its struggles received when the pandemic hit.

“I think there’s a newfound respect for the sector, from the boardroom to the individual consumers at home,” Pang said. “There’s a newfound priority placed on the sector to put in more technology, to put in more innovation, to put in more R&D into making it more agile and more prepared for situations like this, so I’m quite optimistic about what we can see from the sector in the next few years.”

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