Shortages in many sectors are creating inflationary pressure.
At the end of last year, Trajectory forecast that 2021 would be a year of distinct seasons, each feeling quite different to the last. We forecast a feelgood summer followed by a gloomier autumn as the economic consequences of the last 16 months become apparent.
One of the consequences is inflationary pressure caused by shortages of labour and materiel, some of which are now acute.
There are labour shortages in meat processing. Some of this is Brexit-related and the industry is about 11% down on full capacity, something that is prompting increased overtime payments in the short term and higher wages in the longer term.
The problems with meat processing are exacerbated by a shortage of truck drivers. FreshLinc operate 700 trucks and they have had to increase hourly wages rates by between 10% and 30% depending on the type of haulage and the region. The driver shortage is caused by a pile-up of factors including the ending of recruitment from the EU, a backlog of driving tests caused by Covid and tax reforms which have discouraged drivers from the EU staying here. The government have responded to the problem by temporarily relaxing rules on the hours drivers can work – something to think about as a six axle behemoth looms behind you on the M6.
There are shortages of both people and products in construction; timber prices have risen by 80% in the six months to April with copper and steel up 40%. Meanwhile there has been a 42% fall in EU workers in construction – overall the number of people working in construction has fallen by 200,000 in the last year.
The Government has expanded the Seasonal Agricultural Workers visa scheme from 10,000 places last year to 30,000 this year as farmers and growers struggle to harvest crops.
Last year, Opec cut oil production by ten million barrels a day. As economies have reopened this year, demand has soared and the price of Brent crude oil has gone up by 43% to $73 a barrel.
While there isn’t a shortage of shipping containers, many of them are in the wrong place as a consequence of last year’s Covid disruption. The result is that the cost of shipping a 40-foot container from Shanghai to Rotterdam is now over $10,000 – five times higher than it was in 2019.
Then there’s quantitative easing – the process by which the Bank of England prints money to stimulate the economy. Last week, Lord Michael Forsyth of Drumlean – the Chair of the government’s Economic Affairs Committee – expressed concern that the economy is becoming over-stimulated. He said that there were; “…risks, given where the economy is, that inflation could take off.”
In June, the inflation rate hit 2.5%, a number that was well above the Bank of England’s forecast. One of the factors pushing prices higher is the increasing cost of buying secondhand cars. Their value has been driven up by shortages of new cars, which has been caused – in part – by a shortage of microchips…
Basic economics tells us that when supply is low and demand is high, prices go up. We are now witnessing this.
Our concern is that some of these supply-side problems are not easily resolved; the workforce in both haulage and construction is relatively elderly (150,000 truck drivers are aged over 50) making recruitment an urgent issue and meaning that shortages won’t just be a problem this autumn.
What this means for consumers: There will be a spate of price rises in the months ahead across an eclectic selection of goods – this is not a favourable moment to start work on a garden room. There is a risk of some products becoming scarce this autumn or even being unavailable as seen last Christmas. Choice will be reduced and orders will take longer to be fulfilled. Should inflation start accelerating like Max Verstappen, the Monetary Policy Committee may raise interest rates.
What this means for business: At a macro level, shortages may hobble the post-lockdown recovery (the volume of goods and services produced in the UK grew by a less than expected 0.8% in May). There will be increased costs as firms compete for labour in some industries. Trade bodies and bigger enterprises will lobby both the independent Migration Advisory Committee and government for more temporary visas for some trades – the Road Haulage Association has written to the Prime Minister to; “…ask for the introduction of a temporary worker visa for HGV drivers and for this occupation to be added to the Home Office Shortage Occupation List.” Supply chains will come under increasing pressure, logistics will be more difficult, wastage may increase and the cost of moving goods will go up.