For the past three decades, companies and consumers benefited from cross-border connection that kept a steady supply of electronics, clothes, toys and other goods so abundant it helped prices stay low. But as the pandemic and the war in Ukraine continue to weigh on trade and business ties, that period of plenty appears in our opinion to be undergoing a partial reversal. Companies are rethinking where to source their products and stocking up on inventory, even if that means lower efficiency and higher costs. If it lasts, such a shift away from fine-tuned globalization could have important implications for inflation, financial markets and the world’s economy. Economists are currently debating whether recent supply chain turmoil and geopolitical conflicts will result in a reversal or reconfiguration of global production, in which factories that were sent offshore move for example back to the US and other countries that pose less of a political risk. If that happens, a decade-long decline in the prices of many goods could in our opinion come to an end or even begin to go in the other direction, potentially boosting overall inflation. Since around 1995, durable goods like cars and equipment have tamped down inflation, and prices for nondurable goods like clothing and toys have often grown only slowly. Those trends began to change in late 2020 after the onset of the pandemic, as shipping costs soared and shortages collided with strong demand to push car, furniture and equipment prices higher. While few economists expect the past year’s breakneck price increases to continue, the main question in our opinion is whether the trend toward at least slightly pricier goods will last. The answer could hinge on whether a shift away from globalization takes hold. That would certainly be a different world – it might be a world of perhaps higher inflation, perhaps lower productivity, but more resilient, more robust and reliable supply chains. Of course, it’s so far not obvious how drastically conditions will change and it’s not yet clear that we are seeing a reversal of globalization – but in our opinion it’s already clear that it slowed down.
The period of global integration that prevailed before the pandemic made many of the things we buy cheaper. Computers and other technology made factories more efficient, And they chugged out sneakers, kitchen tables and electronics at a pace unmatched in history.
Companies slashed their production cost by moving factories offshore, where wages were lower. The adoption of steel shipping containers and ever larger cargo ships allowed products to be whisked from Bangladesh and China to the rest of the western world for astonishingly low prices.
But those changes in our opinion also had consequences for western factory workers who saw many jobs disappear. The political backlash to globalization helped for example to carry former president Donald J. Trump into office, as he promised to bring factories back to the US. His trade wars and rising tariffs encouraged some companies to move operations out of China, although typically to other low cost countries like Vietnam and Mexico. The pandemic in our opinion also exposed the snowball effect of highly optimized supply chains: Factory shutdowns and transportation delays made it difficult to secure some goods and parts, including semiconductors that are crucial for electronics, appliances and cars. Shipping costs have soared by a factor of 10 in just two years, erasing the cost savings of making some products overseas. Starting late in 2020, prices for washing machines and other bigger sized products jumped sharply as production limitations collided with high demand. Inflation has only accelerated since.
Russia’s invasion of Ukraine has further snarled supply chains, raising the prices of gas and other commodities in recent months and helping to push the Fed’s closely watched inflation index up 6.6% over the year through March. That is the fastest pace of inflation since 1982, and price gains are touching the highest level in decades across many advanced economies, including the US, the eurozone and Britain. Many economist expect price increases for durable goods to cool substantially in the months ahead, which should help calm overall price gains. Data from March suggested that they are beginning to moderate. Rising Fed interest rates could help temper buying, as borrowing to buy cars, machines or home improvement supplies becomes more expensive. But there are in our opinion still serious questions about whether – in light of what companies and countries have learned – major products will return to the steady price declines that were the norm before the coronavirus. It’s not clear yet to what extent factories are moving closer to home. In that factor will have in our opinion a major impact on future inflation.
More firms have already reported moving their supply chains out of China to other countries, and American executives have for example been more positive about bringing more manufacturing back to the US.
Janet L. Yellen, the Treasury secretary, mentioned that supply chains had proved too vulnerable given the pandemic and the war in Ukraine, and urged a reorientation around “a large group of trusted partners”, an approach she called “friend-sharing”. Long run population changes could also compound the effects of a slowdown or pullback in globalization, pushing up prices by making labor more expensive. By 2050, one in six people worldwide will be older than 65, according to United Nations (UN) estimates, up from one in 11 in 2090. That aging in our opinion means that, after decades in which a newly global pool of labor made employees cheap and easy to find, recent world – spanning labor shortages could last. That could push up wages, and companies may pass – and most probably they will – elevated labor costs along to customers by raising prices. Demography and the reversal of globalization mean therefore in our opinion that a great deal of it is likely to be permanent raising inflation for probably the next two to three decades.
People used to say that inflation expectation is the million-dollar question, but we guess these days it’s the billion – or trillion – dollar question. It is possible, but not yet definite, that the world is moving into a new economic era marked by higher inflation amid the changes to global integration amid the changes to global integration and intensifying climate concern. These things are of course very hard to identify in real time – but it seems to us that one era is slowly ending – the era of globalization – and that we are at the beginning of a new era which includes higher inflation and volatile financial markets. The era of “friend-sharing” will divide the world most probably in three parts – including the American continent, Europe and Asia.
