Following our Monday read on whether the Bank of England should raise rates in the face of supply-side driven inflation (short answer: no), we had some of our loyal readers arguing with us about our assertion that what we were seeing wasn’t a rise in aggregate demand, but just a re-configuration of it.
Namely, consumers, thanks to a multitude of factors stemming from the pandemic, are sploshing their cash on consumer durables — an extra screen for the home desk, an Eames chair for the office, or even a new turntable — rather than services. That, in turn, has put added pressure on just-in-time supply chains for these goods that were already operating on the edge pre-Covid. After all, supply isn’t liquid. Capacity needs to be invested in, and infrastructure built out, before supply chains can begin to untangle. And that’s assuming the private sector is willing to invest in the knowledge consumer demand might reconfigure at any moment to its pre-crisis form.
And, just now, we spotted this great chart on Twitter that we think does a decent job of expressing this. It was posted by Robin Brooks, the chief economist at the Institute for International Finance, and shows that while industrial production in the US has returned almost to its pre-crisis highs, expanding lead times show that this is a crisis stemming from a demand shock:
This chart is particularly telling as, compared to the UK, the US is a relatively closed economy. So lead times are a good indicator of its supply and demand characteristics.
And in case you’re wondering how demand for services looks at the moment versus industrial goods, according to data from OpenTable the number of diners sitting down for a meal at a US restaurant is still 6 per cent below where it was in 2019:
So how does this resolve itself? One theory we’ve heard, which we think is worth repeating, is that if demand normalises at the same time as fresh industrial capacity comes online, we could see a swift reversal in inflation. Chuck base effects and a rapidly slowing China into the macro mix — a nation that, remember, is estimated by Goldman Sachs to have accounted for “almost all of the global metals demand increases over the past 20 years” — and there’s a non-distinct chance we might even experience . . . <whispers> . . . the dreaded D-word in 2022.