The prices of basic commodities, especially materials needed in the construction and manufacturing industries, have skyrocketed recently due to supply shortages caused by the pandemic and tariffs left behind by the former president. Prices for steel, semiconductors (mainly used for autos and electronics), drywall, aluminum, and lumber (the price of which has nearly tripled) have all increased, making it harder for construction companies to build houses and auto manufacturers to produce cars. In the housing sector, aggregate demand has stayed high, resulting in even higher prices due to the low supply of houses. The semiconductor shortage has already taken effect in the auto industry, where producers are sometimes having to cease production in factories for weeks at a time due to not having enough materials. Automaker Ford said that its production in the second quarter would be “about 50 percent lower than planned and that the shortage would reduce the company’s profit about $2.5 billion in 2021” and the Alliance for Automotive Innovation stated that “Automakers could end up making as many as 1.3 million fewer vehicles this year as a result of the shortage.”
The Federal Reserve is not overly concerned with the situation at hand, and chairman Jerome Powell said that it was expected to see “short-lived price spikes as the economy reopened and consumers started spending again.” Powell views this type of inflation as something that is temporary and won’t roll into a much bigger problem. However, many others like Honeywell CEO Darius Adamczyk foresee inflation taking hold and potentially wreaking havoc on the economy.
Biden and his team say they are closely monitoring the situation, but many groups want them to take action. For example, carmakers are asking the administration to order semiconductor producers to prioritize them first, as automakers make up a significant portion of the economy. Altering the supply chain is a long and arduous process, and any changes to help one industry could hurt another.
This situation relates directly to what we’ve talked about in class. As supply falls and demand stays constant or increases, the price of goods will rise as a shortage is incurred. The increased prices of goods that suppliers face will make their way to consumers in the form of higher prices. This current price inflation could be nothing but a short-term spike, or it could turn into a long-term problem.
Questions:
Should the government take steps to regulate the supply chain and prioritize more crucial industries? If so, for how long?
Who should handle the situation to stop the threat of looming inflation - the White House, the Federal Reserve, the Treasury, or someone else?
In earnings statements last month, some of America’s largest companies warned that higher commodity prices would soon be passed on to consumers. How long do you think the price increases will last?
6 comments:
I think there is nothing to worry about. There have been no structural changes that would have caused this issue. This is simply a growing pain of the globe phasing out of Covid - 19. After the outbreak of covid-19 the demand for many goods screeched to a halt. Furthermore, supply declined significantly as manufactures slowed or shut down the production of many goods. Now, with the economy starting back up again, their will be commodities that lag behind demand.
This situation reminds me of the production possibilities graph that we learnt in our intro to economics. Now that there has been a cut in capital, production has starkly decreased in multiple industries as mentioned in this post. One thing to note is that if the government does step in to prioritize certain industries in attaining capital over others, it will most definitely hurt the other industries. This is best described through the production possibilities graph itself. The more capital that's allocated to a certain industry, the more they can revitalize. However, this has an indirectly proportional effect on other industries, in which their quantity supplied will further decrease due to the reallocation.
I think it would be tough for the government to prioritize more important industries, since it would result in other industries feeling the shortage even more acutely. Especially with the global chip or semiconductor shortage, since they are used in such a wide range of industries, prioritizing the automotive sector would hurt computer companies, appliance makers, and many more. That particular shortage is also predicted to continue for a while as well, due to the difficulty of expanding production as well as tense relations between the US and China, where many of the factories are located. Consumers will have to bear the higher chip prices for at least six more months, and potentially up to a year, while other commodities could recover more quickly and return prices to normal.
I agree with one of the other commenters. There are no structural changes that have cause the issue. Through the shock that cover 19 did to the market, we are undergoing growing pains of our economy coming back to life. It is actually amazing how much cover 19 has affected the market. I was looking at biotech, a tech company in germany, and it was down tremendously because the U.S backed Canada in giving India free covid vaccines. This whole cover 19 pandemic has shook our economy and we are just starting to build it back up.
I do think that prioritizing more crucial industries in a plan to assist with inflation would be a good idea, however it would not be too easy. I feel that tackling inflation in itself is quite a hard task, and really just takes time and some reform in order to restore. I think that handling inflation should be a collective effort and not something that one dept. attacks in a specialized way. This should also be done in a somewhat urgent manner. The rise on commodities can threaten industries, and while there is some baseline inflation due to time passing, a lot of recent inflation has been attributed to the economic deflation caused by COVID-19.
A couple more eloquent comments above me have already stated this, but this is a completely expected growing pain that comes with reintegrating pre-COVID regulations back into society. Due to COVID, we couldn't produce much supply because of the regulations surrounding esential work, and now that demand has also risen due to reintegration and we haven't returned to full capacity, that only means that prices will rise until supply can meet demand. It's gotten pretty bad if these sources are anything to go by, so it is important that the government steps in until industry can meet demand - though I'm not exactly sure of which department that responsibility would fall on.
Post a Comment