Pricing pressures continue as labor, supplies remain scarce

Prices appear likely to continue rising in a pandemic-altered environment that continues to see high inflation in many countries, according to Tim Mahedy, a senior economist and senior director at KPMG.

The pandemic has led to extremely high inflation in some countries. The 7.5% year-over-year increase in the consumer price index reported for January in the US was the highest since the one-year period ending in February 1982.

The UK Consumer Prices Index’s year-over-year rise of 5.4% for December 2021 was the highest in the historical modelled dataset in almost 30 years. Inflation is at highs in many locations due to two main factors:

  • Many people have left the workforce as they re-examine their priorities amidst personal trauma caused by the pandemic. This has driven up employer costs along with the price of goods and services.
  • Business interruptions caused by the pandemic have led to supply chain disruptions that have slowed production and the delivery of goods. Meanwhile, with some consumers wary of travelling, they are channelling more discretionary spending towards goods. This higher demand, coupled with the shorter supply, is leading to rising prices.

Some analysts believe global supply chain difficulties already have peaked and will continue to ease, but the turnaround may be slow and difficult. Mahedy said the supply chain challenges may ease a bit as a driver of inflation but are not going away.

“That high demand with low supply has caused a rundown in inventories, which means that persistent supply chain pressures will make it hard for businesses to fill future demand, even as the pandemic ends,” he said.

Meanwhile, labour cost increases don’t show signs of abating, according to Mahedy. He said wage increases appear to be even less transitory than the supply chain woes. Economic policymakers and central banks across the world are concerned that a wage-price spiral could materialise, with higher wages leading businesses to increase prices, which then leads to higher wage demands in an escalating cycle.

Policymakers would be expected to act to prevent that wage-price spiral, but Mahedy predicts that rising wages will continue to be a factor employers must contend with for some time.

“Even if things cool off a bit, there’s still a huge mismatch in labour supply and demand,” he said.

This means retaining employees will remain difficult, as they are likely to have many other opportunities and competition for their services will be intense. Mahedy said employers who believe they can’t raise salaries may need to embrace flexible work arrangements and other benefits that could make employees more inclined to stay.

Mahedy said that although he expects inflation in 2022 to continue at rates much higher than the low numbers many countries saw in the year before the pandemic, the record-breaking price rises of recent months will abate as policymakers react to the recent trends. In the US, for example, he expects year-over-year rates of 2% to 2.5% to become more commonplace in the years ahead.

That cooling would be a blessing for businesses hoping to limit price increases so they don’t scare away their customers.

“There are trade-offs,” he said. “If you’re most concerned about the inflation rate now, hold tight, inflation should ease a little by year-end, and even more next year. Supply chain pressures won’t last forever. But at the same time, those labour dynamics mean that unless we have a contraction or a significant slowdown in the labour market, there’s going to be a limited supply of labour for years to come.”

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