There are five reasons why prices keep increasing.
Supply Chain Disruptions
The worst months of the pandemic are behind us. However, it disrupted almost all business operations in multiple ways, and the effect is still being felt. Companies experienced a significant reduction in demand because consumers were not buying goods and services.
Millions lost their job; the unemployment rate soaring to almost 15%, the highest on record. As normal demand patterns changed, companies cut orders to their suppliers, disrupting the supply chain, especially when combined with employees calling in sick.
But with more people at home, demand for items like paper products, flour, dairy, frozen food, electronics, etc., rose unexpectedly quickly. As a result, producers could not meet consumer needs, and prices started to rise. Alternatively, the retail price stayed the same, but sizes and quantities became smaller, i.e., shrinkflation.
As the unemployment rate dropped and demand started to rebound, everything reversed and many companies did not have enough supply to meet demand. Big-ticket items like cars, electronics, RVs, etc., must be planned in advance by manufacturers to order input materials and change tooling and processes. This also drove up prices.
China remains an uncertainty in the global supply chain. The country manufactures a large percentage of electronics, consumer goods, fasteners, etc. But the government has locked down entire cities because of COVID-19 restrictions. Companies utilizing China as their manufacturing hub are severely impacted. Apple is now attempting to move manufacturing to India and Vietnam.
China’s lockdowns and resulting supply chain disruptions likely limit supply and also contribute to high inflation.
Labor Shortages
In the US, labor shortages are hindering production for small businesses, manufacturers, farms, etc. Unemployment is sub-4%, and jobs are plentiful and easy to find. The United States had 21 months of job growth. Companies have reported people retiring early or leaving for new jobs.
When companies and small businesses have difficulty filling positions, production and output suffer. Also, they must pay higher wages for labor that are passed on to customers. Hence, rising wages are contributing to high inflation.
Drought
One wild card in rising inflation is drought. Globally, drought has been a significant problem, and 2022 worsened it. In the United States, many large agricultural states are experiencing prolonged droughts.
Parts of China, Europe, and Africa are experiencing their worst drought in decades.
Drought has reduced agricultural production by farmers. Ranchers have reduced the output of livestock. The result is rising prices for grain, cereals, dairy, and meat, as experienced by many people in grocery stores. In some regions, drought will not end soon, and prices will probably stay elevated.
War in Ukraine
