Impact of Supply Chain Inflation on Consumer Prices

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what is ecommerce shipping
  • Logistics network struggling amid supply and demand constraints
  • What does inflation look like in 2022?
  • How is inflation affecting freight costs and labour shortages?

The interconnectedness of global supply chains means a change in one network can profoundly affect the others. We’ve seen this happen numerous times throughout the years, especially when it comes to pricing, as when one company raises prices, other companies tend to follow.

Supply chains are experiencing unprecedented strain post-pandemic, with rising labour, energy and transportation costs also spurring an increase in the price of consumer goods.

In the UK, prices of goods are rising at the fastest rate seen in the past 30 years, and wages are failing to keep pace.

While you might not notice rising prices month-on-month, in the 12 months to January 2022, inflation rose by 5.5%. The Bank of England (BoE) has since warned that inflation could rise above 7% by year-end – meaning that a £1 bottle of milk could cost £1.07 by 2023.

The 7p jump might seem like a slight increase, but if we look at the cost over time, the price of a pint of milk has doubled in the last 30 years. If inflation continues to rise by an annual rate of 7%, a £1 bottle of milk will cost just shy of £2 in 10 years.

Let’s consider how that could affect the price of something more expensive. For example, the average selling price of UK property is £271,000, which would rise to approximately £533,000 by 2032.

The disruption caused by COVID-19 has exposed weaknesses in global supply chain resilience. Although we are turning our back on the pandemic, moving goods through the supply chain remains a challenge due to production and demand issues at various touchpoints, all of which are contributing to inflation.

Supply and Demand Dynamic Fuelling Inflation

There is an inverse relationship between supply and demand. Although experts expected consumer demand resulting from economies emerging out of coronavirus lockdown restrictions to trigger a spike in prices, few anticipated the level of disruption it would bring to the global logistics network.

Supply chains have struggled to meet pent-up demand arising from COVID-19, and as a result, the shortages of goods and services has caused upward pressure on prices.

Until kinks in the supply chain are ironed out, consumers will continue to experience elevated pricing. Although government banks have said they are prepared to introduce measures to ensure economic stability and reduce price pressures if inflation continues to spiral, it’s difficult to dismiss the current pace of inflation as temporary if these conditions persist.

Many logistics firms are also navigating other issues such as the labour and skills shortage.

Businesses will need to invest more into transport, workers, training and supply chain resiliency to improve the global logistics situation; to achieve this, they will pass on the costs to consumers in the form of higher prices.

Raw material costs are causing many supply chain leaders to revise their fiscal plans. According to recent statistics from the World Bank, the Raw Material Price Index is 18% higher than a year ago, with thermoplastic, steel and cotton rising at an unprecedented pace.

Will Inflation Continue Rising in 2022?

By the end of 2021, the Consumer Prices Index (CPI) was 5.4% higher than the previous year, with the annual increase representing the highest rate recorded since March 1992.

Although unexpected events such as a storm or flood and lingering uncertainty around COVID-19 could cause a further increase in prices, many central banks, including the BoE and US Federal Reserve, see inflation as temporary.

The BoE believes inflation will return to the 2% target rate by 2024 and is prepared to raise interest rates and make saving more attractive if that appears extremely unlikely.

However, rising interest rates also risks weakening the already-fragile economy, which is still fraught with uncertainty as scientists continue to discover coronavirus mutations.

Elevated prices reflect the significant shift in our lifestyles post-pandemic, with many people now working from home or under a hybrid system.

Brick-and-mortar store closures also accelerated the digital transformation, with more people shopping online and at a greater frequency. Hence the reason why eCommerce retailers such as Amazon, Walmart and ASOS have reported record rises in profits after the pandemic.

How is Inflation Impacting Freight and Distribution Costs?

Price increases are reverberating throughout the supply chain, with many businesses facing higher transport and freight costs.

The Global Container Freight Index peaked at $10,839 last September – almost ten times higher than the same month two years ago. Although the index declined to 9,293 in December, it appears to be rising steadily after hitting 9,806 in January 2022.

As people were buying less during the pandemic, the industry curbed production. However, vaccine rollouts increased consumer confidence and gave way to heightened demand. As a result, many businesses are now trying to catch up.

However, increased demand isn’t the only factor — container shortages, saturated ports and lack of skilled workers — contributing to the squeeze on transportation capacity.

One of the biggest contributors to rising freight costs is the spike in oil prices.

The rebound in demand for fuel is creating a tight market. With oil refiners focusing on petrol and diesel production amid increased demand, bunker fuel prices have become more expensive.

However, with global trade relying heavily on maritime transport, higher prices increase transportation costs.

Before the pandemic, high-value goods would often be transported by air, but as airlines are operating at reduced capacity, most of these items are being sent by sea. As a result, these goods now have to compete with low-value imports for space on cargo ships, contributing to trade disruption and delivery delays.

Low-value imports are also facing significantly higher shipping costs due to increased competition. As a result, logistics leaders are passing on the costs to consumers in the form of higher prices to navigate transport costs.

Other disruptions to shipping such as storms, floods, and the Ever Given ship in the Suez Canal in March 2021 have increased the strain on the global logistics network by producing additional bottlenecks in the system.

The key concern is whether inflation from rising oil prices is transitory or permanent. If inflation is permanent, this could lead to slower economic growth, especially since incomes aren’t growing at the same pace as the cost of living.

What Effect Do Shortages Have on Supply Chain Inflation?

As the pandemic abates, the lingering effects of lockdown restrictions become more prominent, with labour shortages and supply chain constraints likely to delay global economic recovery.

Shipping has become expensive, ports are clogged, and the shortage of skilled workers has resulted in delays and cancelled orders.

As inflation is hotter and more persistent than ever, retail giants like Amazon have gained more market share than small and medium-sized firms, which are hit hard by price pressures.

One was positive that came out of the pandemic was the number of new business startups. However, the relentless rise in the price of goods and services, transport costs and supply chain disruption have created even more instability and uncertainty for new businesses.

To cope with inflationary pressures, delivery delays, and higher wages caused by labour shortages, small business owners will need to cut costs and invest in operational resiliency by outsourcing with a 3PL professional such as Pointbid Logistics.

While supply chain disruption should be resolved by 2025, early action to develop supply chain resilience will help you streamline your operations and position you for a brighter future.

If you think that outsourcing your order fulfilment could help your e-commerce business save time and money in 2022, it could be time to give Pointbid a call. At Pointbid, we take the time to get to know your business to ensure that we choose the right fulfilment strategy for you. From goods in, picking and packing, to timely shipping, we take care of the order fulfilment process from start to finish. If you’d like to know more, please do not hesitate to give us a call on 0121 326 7368.

 

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