The Impact of Supply Change Shortages on the Global Economy

It could be said that a supply chain crisis is a particular form of inflation, but with a difference that implies that the products are really scarcely available and therefore more difficult to find, which in turn makes them exponentially more expensive and triggers inflation. Since products cannot be easily procured, their value automatically increases. The change that occurs is very subtle in principle: the product is the same and performs the same function as always, but since its supply chain is unable to procure and distribute it as usual, its economic value skyrockets.

Let's explore some concepts now.

1. What exactly is a material shortage in a supply chain?

A shortage of materials in a supply chain is a market anomaly that causes a product or service to become unavailable following a sudden change in the pace of production, supply and procurement. A shortage of materials can be caused by many different events. For example, a major natural disaster can destroy a company's manufacturing facilities and cause a temporary stop in production. Other events that can cause a crisis in the supply chain are a war and - as infamously known - a global pandemic like the one we have witnessed in the last two years. In summary, whenever a product - raw material or finished goods alike - cannot be easily found on the market, there is a condition of shortage in the supply chain, which means that the supply chain responsible for distributing the product on the market does not function properly and does not perform its supply functions.

2. How does a shortage of materials affect the global economy?

The magnitude and duration of the current supply chain crisis is a prime example of how the economy can be affected. If you are familiar with the electronics market, you have certainly heard of the "microchip crisis". Microchips are a gold mine at the moment, since they are not produced regularly and are not distributed regularly. If you happen to find a family of microchips available for purchase, you should be ready to pay for it by its weight in gold to ensure you get your hands on it. This also causes significant imbalances in various markets: by way of example, let's consider the automotive market. An average car these days has up to 16 microcontrollers on board and therefore, since the availability of micros has drastically decreased, the production cycle of a car cannot be completed. The necessary electronics are missing. Basically, this is a clear example of a chain reaction: the supply of silicon is drastically reduced, which causes the supply of microchips to be drastically reduced, which in turn prevents cars manufacturers from carrying out their production plans, resulting in a general shortage of cars available for sale. This example focuses on a particular market, the automotive one, but the shortcomings in the various supply chains cause a cascade of effects, similar to the one just described, in any industry and market, and this is how the economy suffers a huge impact on a global scale.

3. What is the relationship between material shortages and inflation?

The results of supply chain shortages on the global economy contain within themselves an impact corresponding to that of inflation. Indeed, shortages almost always result in inflation if they are not addressed and resolved within a reasonable amount of time. According to one of the most important and pivotal rules of economics, when the offer of a certain product is low and the demand is high, the price of that product increases exponentially. This price increase in turn causes inflation to unleash, with inflationary events that are not limited to the specific product, but impact on families of related products as well. Consequently, purchasing power collapses and the normal costs associated with the activities that transform inflated products into outputs that can be received by the market increase in proportion to the value of inflation.

One way to prevent shortages from causing inflation is to leverage macroeconomic forces that can restore the balance between offer and demand. Alternatively, suitable and readily available substitutes for inflated products need to be identified. None of these solutions are quick or easy and that is why the whole world, almost two years after the triggering event, is still facing a heavy supply chain crisis, with unattainable delivery times and price increases that are hard to digest even from an inflationary point of view.

4. Conclusion

The international economic system is constantly evolving, but ideally all supply chains need to maintain a solid core to ensure that the inputs (raw materials, components, commodities) can be delivered in time to entities that transform them into output sold on the market and used by people around the world. When this mechanism of linked and consequential supplies does not work properly, there are inevitably consequences: the relationship between offer and demand is altered and market anomalies arise.