As vaccination rates across the globe continue to climb, economies have reopened and business restrictions have eased. However, significant problems remain with respect to bottlenecks that persist in global supply chains. One sector that has gotten a lot of media attention and remains a significant impediment to total global production is the scarcity of semiconductors. While the chip shortage has limited production across many industries, it has been particularly problematic for the automotive industry with assembly lines being shut down and some cars now being shipped without features that rely on semiconductors.
In the United Kingdom, auto production plunged 37.6% from a year ago in July to the lowest level since 1956 amid a chip shortage and employee absences that are mainly attributed to the pandemic. Domestically, General Motors announced last week it was stopping production at most of its North American plants for one to two weeks due to the tight supply of chips as it prioritizes the production of its most popular and profitable vehicles. Ford, Toyota, Daimler, and Volkswagen have all reported semiconductor shortages that are negatively impacting production plans.
The tight chip supply has led to limited inventories of new vehicles at GM and across the industry, with nearly all major automakers curbing production in response to the shortages. This in turn has propelled automobile prices sharply higher amid continued strong demand. Indeed, the consumer price index for new vehicles climbed 6.4% from a year ago in July, while the price index for used cars surged an astounding 41.6% over the same period. The sharp increases in car prices – particularly for used autos – contributed significantly to the 5.3% increase in all items consumer prices in July from a year earlier, the largest annual increase since July 2008.
Consumer Inflation Remains Stubbornly High
While many automobile manufacturers thought the chip shortage would be easing by now, strong demand for vehicles and the surge of Delta Variant cases in Asia, where many of the chip manufacturers are based, means the shortage will continue into 2022 and perhaps even longer. Exacerbating the chip shortage is the movement to electric cars. Ford estimates production of a Focus requires roughly 300 chips compared to up to 3,000 for one of its electric vehicles. The inadequate supply of chips and solid demand will likely keep automobile and other producer prices elevated over the near term.
Producer Prices Come In “Hot” In August
We received our first glimpse into inflation for the month of August and headline number came in “Hot”. Final demand producer prices climbed 0.7% in August, down from 1.0% in July but above the consensus forecast of 0.6%. Producer prices have risen by an average of 0.9% a month this year, suggesting supply chain constraints, increasing labor costs, and a shortage of raw and intermediate materials are conspiring to drive production costs higher.
The most pronounced producer price increase last month came in foods (+2.9%), transportation & warehousing (+2.8%), trade services (+1.5%), and goods (+1.0%).
Food and Transportation and Warehousing Prices Surged
Producer price inflation jumped to 8.3% year-on-year, a new record-high for a series that dates back to 2010. Inflation from this measure was only 1.7% in January, implying producer cost pressures continue to build. In a bit of a silver lining, core producer prices, which exclude the volatile food and energy categories, rose a more modest 6.7% year-on-year. However, this is also the largest annual increase ever recorded.
Inflation is likely to remain at higher levels for a longer period of time than most economists anticipated shortly after the U.S. economy reopened last summer. Overall producer inflation – which rose 9.0% year-over-year in the second quarter on a seasonally adjusted basis – is projected to remain around 10% through the end of the year before gradually moderating in 2022.
This is expected to translate into continued high consumer price inflation into the first half of 2022 as producers raise retail prices to protect their profit margins. Indeed, several districts in the recent Federal Reserve Beige Book survey “indicated businesses anticipate significant hikes in their selling prices in the months ahead.” As a result, we are forecasting headline CPI inflation on a seasonally adjusted basis will remain well above 5.0% through the first quarter of 2022. Thereafter, consumer inflation should moderate through next year but remain above pre-pandemic levels. Persistent supply chain bottlenecks, high commodity prices, rising labor costs, and accelerating housing prices will boost consumer price inflation over the near term.
Risks remain tilted to upside, in our opinion, with inflation remaining higher for longer. New coronavirus variants, the bipartisan infrastructure bill, and the American Families Plan are important upside inflation risks that have the potential to keep inflation higher than our baseline forecast as they keep demand stoked and could cause supply chain bottlenecks to linger. While we still see this inflation as transitory, there is rising concern it could overstay its welcome.
To learn more, check out this week’s U.S. Outlook Report.