Inflation Fades as Supply Chains Flex around Trouble

The Economist recently published an article suggesting that inflation could be the new normal for our post-pandemic world economy. I think they’re overestimating political factors and underestimating the flexibility of global supply chains.  

The most recent US CPI data agrees with me. 

It’s Not 1980 Anymore 

Pre-Covid, from 2008 to 2020, we saw an extraordinarily stable economic period of decent growth, low unemployment, and near-zero inflation. We can thank China and Walmart for much of the mechanics of ever lower prices and ever more stuff.  

When the pandemic hit, however, the key pieces of this Goldilocks economy broke down simultaneously. Travel bans crushed global commerce while lockdowns and disease drove seismic demand shifts away from certain items (restaurant meals, business attire) and toward others (surgical masks, exercise equipment). Plus, huge stimulus payments sustained an explosion in online shopping that saw Amazon volumes jump 50% in a month. 

And yet, US inflation peaked at only 9.1% and came down quickly. Compare that to 1980, when inflation, not only in the US but also in the UK and France, stayed above 10% for three years with no big external shocks to blame. We were still hostage to an inflexible supply chain that couldn’t shake off the oil crisis created by OPEC six years earlier. 

Four Reasons the Post-Covid Supply Chain Is Super Resistant to Inflation 

Awareness of supply chains has been way up since Covid, with mentions in quarterly financial analyst calls doubling between 2021 and 2022, often alongside words like “fragile” or “shortage.” The crisis highlighted risks that practitioners had known about and been addressing for years. In fact, the resilience already baked into supply chains is why food and essential supplies never actually stopped being replenished on store shelves when home delivery skyrocketed. 

There are four big factors contributing to supply chains’ ability to absorb a $4.6T increase in US money supply since 2020 without triggering a monetary crisis:   

1. Customer choice holds pricing power in check.

The most painful inflation is on items you can’t avoid, like fuel, rent, and healthcare. For highly visible things, like groceries and entertainment, however, choice makes a difference.

Compare e-commerce, remote work, and streaming entertainment options now to what we had 40 years ago, and it’s clear why companies like PepsiCo, ConAgra, and Delta Airlines are seeing pushback on higher prices.

2. Automation replaces labor.

This dynamic has been around since the Industrial Revolution, but it’s gaining momentum. Robotics innovation is exploding thanks to the convergence of demographics and genAI-based robot training techniques.

Robots per 10,000 workers increased by 129% between 2017 and 2022 in Switzerland. In Korea, the increase was 43%. In China, it was 304%. Companies like UPS and Tesla are using this to resist wage inflation.

3. Resilience as religion.

Lean, low-cost supply chains grew up following China’s WTO admission in 2001. Since 2010, however, companies like Nike, Samsung, and Cisco have made moves to derisk overdependence on China by diversifying into Vietnam, India, and Mexico, among other places. The pace of change was slow, though.

Covid changed everything. Resilience became a buzzword and visibility tools, scenario modeling techniques, and disaster recovery plans took center stage in supply chain strategic plans. The result is a much more fault-tolerant system that handled crises, like the Red Sea attacks and the Baltimore bridge collapse, with minimal business impact.  

4. China is still exporting deflation.

Political posturing, whether by Donald Trump or Xi Jinping, may leave the impression that we’re deep in a global trade war. Not really. Chinese exports grew 8.6% in June 2024 despite rising tariffs in the EU and US. Plus, the shift in manufacturing to Vietnam, India, and other places still depends on the Chinese production of raw materials, components, and equipment.

Behind the political bluster, China and Western business remain partners, often shifting plant locations, but keeping contracts and relationships in place. Plus, China’s best-in-the-world manufacturing capacity is still massive, while the country’s need for GDP growth compels it to keep selling abroad. 

Politics is noisy and attention-grabbing, but the demographic, technological, and economic forces behind these four factors will likely prevail. 

Inflation will fade in time.