Views /Opinion

Supply chain disruptions and inflation

Inflation has become a real crisis, as described by the Canadian Prime Minister Justin Trudeau last week as the second-largest problem in the post-Covid-19 world, and that inflation with supply chains are two terms that have been widely circulated in the media, research centers and the institutions concerned with economy worldwide since the outbreak of Covid-19 by end of 2019. “Empty shelves” is the third term associated with it, and the matter extends forever, marred by more anxiety and fears.

Concern in the financial and business circles is transmitted to consumers, and I would like to begin with an attempt to clarify the extent of the relationship between inflation and supply chains. This is owed to the fact that the dominant belief that disruption of supply chains is the first reason to which the rise in inflation is attributed sounds true to a large extent.

As for the concept of inflation, it has become very clear to the general public. They almost know its causes and how to deal with it. As for supply chains, some may understand it as just companies that supply or export goods. But the fact of the matter is that the concept is much broader. It is a connected network of individuals, organizations, resources, activities and technologies involved in the manufacture and sale of a product or service. The first link of the supply chain begins from the supplier of the raw material to the manufacturer and ends with the delivery of the final product or service to the final link which is the consumer. In other words, supply chains are the steps taken to transform a product or service from its original raw state to its manufactured form and to make it available to the end-user/ consumer.

When the Corona pandemic struck the world, supply chains were the most negatively affected sector, due to the layoffs of thousands of workforce. Factories stopped production in China and others, many airports and harbours were closed and the shipping sector was disrupted. This latter is the most important link in the supply chain. As a result, markets and store shelves around the world were almost emptied of goods of all kinds. At the same, demand increased due to the consumers’ desire to stock up food, in anticipation of the prolongation of the pandemic and the imposition of strict lockdown. It was from this point that the specter of inflation loomed large in the world, as demand increased while there was a lack of supply. However, in the beginning, there was much worry, as everyone agreed that the pandemic would undoubtedly disappear or would be coexisted with, and thus waters would return to their normal course. 

What happened thereafter is that countries started disseminating vaccination and their economies started recovering. However, the shipping and marine transportation sector continued to suffer, as ships stopped for long days on the high seas and oceans before they were authorized to enter ports to offload.

Logistics services were unable to return to normal operation as before the pandemic. This resulted in more demand for liquidity among consumers as a result of the aid provided by countries to help them face price hikes. This was done without being matched by an acceleration in supply equivalent to the acceleration of vaccination programs, to allow the gradual return of life to normal. Statistical reports indicated that the rate of increase in the consumer turnout index witnessed an acceleration in developed and developing countries during 2021. In advanced economies, the average annual inflation recorded during the second and third quarters of 2021 was about 4% in the OECD countries, and 5.1% in the United States, which is the highest increase in 40 years, compared to 2.1% and 1.8%, respectively, during 2019; before the pandemic. 

In fact, inflation will continue during this year 2022 which is considered a “test year” for the credibility of central banks in their efforts to control price increases. The greatest fear of continued inflation revolves around emerging markets, which always bear the consequences of economic crises.

In such circumstances, many questions arise, such as: is inflation required in certain circumstances? Are there parties that benefit from it and what solutions must countries resort to? These questions and others impose themselves, and still, the most important question for us is: what about the GCC states in general and Qatar in particular?

To answer these questions, one or two articles are not sufficient. We hope to cover them in detail in future articles, but in short: Yes, experts believe that inflation is required in certain cases, such as to encourage producers, provided that it does not exceed 2%. As for the beneficiary parties, they are the ones who are not satisfied with the external causes of high price but also resort to storing goods in the hope of more gains.

There is no overstatement of the matter, and the GCC states are not only close to the problem but at its heart, because of their significant status in the global economy, given their oil and gas reserves. The global effects of the pandemic, price hikes and the lack of basic commodities on store shelves are all similar to the situation in our GCC region. For we are in Qatar often exercise transparency, inflation has reached 6.47%, due to the high prices of commodities some of which are luxury items. They are luxuries in the sense that they can be dispensed with temporarily, especially entertainment. The golden rule is that to solve a problem, you have to recognise it, assess its magnitude, causes and, ultimately, reach the solution. 

Experts believe that the best solution begins with an increase in salaries or the cost of living allowance. Indeed some countries have taken these steps. The USA raised the minimum wage to 15 dollars an hour, and Germany to 12 euros. Despite not being popular, one of the effective solutions is linking retirement pension to the inflation rate. From the point of view of those who oppose the idea, it will keep inflation rates stable. The preferred solution is that governments must curb the price hikes on the one hand, and consumers must limit consumption to basics and go for a savings policy on the hand to provide liquidity for necessities. Opinions are so many and varied, but our confidence in the steps taken by our government is limitless.

Dr. Buthaina Al Ansari is a Qatari academic and author. She held many senior  positions in government and private sectors and higher education institutions including Qatar University.