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Sunday Times Economics Editor David Smith writes an exclusive column for ICAEW’s Financial Services faculty every month. This month he covers how continued disruption to supply chains could affect inflation.

Directly across the road from where I am writing this piece, there is a house with a large rectangular hole in its roof, covered with a tarpaulin. It has been there since April, awaiting the arrival of a loft window, due to be delivered from a factory in Denmark. But the window has not yet left the factory, and may not yet have been manufactured, because of a shortage of components.

Meanwhile, in car showrooms up and down the country, sales staff are awaiting the September new car registration rush with some trepidation. Vehicles that were ordered for enthusiastic buyers, some of them with lockdown savings burning a hole in their pockets, may not arrive in time. Not since most British buyers bought home-built cars, and the industry was beset with industrial relations’ problems, have waiting times been so long. Then it was striking workers, now it is mainly a shortage of microchips. And when new is not easily available, some buyers have been going for nearly new. Second-hand cars have been enjoying a mini boom.

Even if the products can be made, there are serious questions about whether they can be delivered. The UK is experiencing a serious shortage of commercial vehicle drivers, particularly HGV (heavy goods vehicle) drivers. The Road Haulage Association (RHA) estimates a shortage of up to 100,000, from a pre-pandemic total of 600,000, as a result of Covid, Brexit, early retirement, a cut in the number of new drivers being trained during the pandemic, and IR35 tax rules. This is exacerbating supply chain problems and resulting in gaps on supermarket shelves, component shortages and even delays in milk deliveries.

If transport is a problem at home, it is also a difficulty when it comes to the international movement of supplies. Even during the serious phase of the pandemic, in the run-up to Christmas last year, there were severe bottlenecks at ports. The temporary blockage of the Suez Canal added to the difficulty. The global decline in commercial aircraft flights is another factor. Many exports and imports are carried in the holds of passenger planes, which have been flying much less than usual. More than a fifth of the UK’s overseas trade by value comes through Heathrow Airport alone, and more than a third of non-EU trade.

This is not the first time that supply shortages have restrained growth and pushed up inflation. Oil price shocks, beginning in the early 1970s, have been a feature of the global economy for decades. In the summer of 2008, as the financial crisis was breaking, crude oil prices surged to a record of almost $150 a barrel. Oil prices have surged again, from less than $30 a barrel during 2020 to more than $70 a barrel at time of writing. But the Organisation of Petroleum Exporting Countries, far from holding down output to increase prices, is currently planning to boost it.

It would be easy to put current supply shortages down to the temporary effects of simultaneously opening up economies that were closed as a result of the pandemic. That is certainly what the Bank of England has been hoping, not least because it does not want bottlenecks to have a persistent upward impact on inflation.

Ben Broadbent, one of its deputy governors, said as much in a recent speech. “Quite a bit of the current rise in inflation is actually coming directly from the higher price of oil, something that is likely to fall away through the early part of 2022,” he said “And, as we’ve seen, periods of rapid price rises in other traded goods haven’t just been temporary – they’ve often been followed by below-average rates of inflation. So, while we know it’s going to go further over the next few months, I’m not convinced that the current inflation in retail goods prices should in and of itself mean higher inflation 18-24 months ahead.”

Broadbent saw reasons to worry about the labour market, and the “mismatch” between the skills in demand and those available in the workforce, including those HGV drivers, but other shortages should ease soon.

It is reasonable to pin some of the current more widespread shortages on the return to growth after the shock of the pandemic. The opening up excuse is, however, wearing a little thin. China, where supply shortages began, staged a strong economic recovery last year, quickly recovering to pre-pandemic levels, and America soon followed. The UK recovery from the third and (it is hoped) final lockdown is six months’ old. If these were just early-recovery teething troubles, they should be easing, not intensifying.

That is why some experts are pessimistic about supply chain prospects. In a piece for ING, the Dutch bank, Joanna Konings, its senior economist for international trade, declares that “supply chain issues are here to stay”. They were emerging before the pandemic, because of protectionism, and they have intensified since.

“The faltering of supply chains is partly because of the strange effects that the pandemic has had on global economies,” she points out. “Even as demand for goods overall has remained strong, the stop-start nature of different recoveries has disrupted supply chains at different points, displacing empty containers and becoming one of the pinch points in international trade. Ocean freight capacity more generally has also reached the limits of what it can deliver while health measures remain in place at ports.”

The situation will improve but shortages will continue until well into 2022, she predicts. New container capacity will come onstream, but most of it not until 2023.

Oxford Economics also warns that the situation will take time to resolve, though it sees relief on the way. According to a report to clients: “Supply chain disruptions across most sectors should begin to unwind from H2 2021, as the reopening of consumer services and diminishing fiscal support lead to a moderation in goods demand, whilst easing material shortages allow manufacturers to ramp up production. However, this moderation in disruption will be gradual, and we expect capacity to remain tight and price pressures to stay firm for the rest of this year.”

Shortages will eventually ease but, in the meantime, they will both push up inflation – probably to 4% in the UK according to the Bank of England in its August monetary policy report – and act as a constraint on growth. Economics tells us that shortages are often followed by gluts, and that would not be healthy either. The return to normal could be a bumpy one.