The Era of Cheap and Plenty May Be Ending
For the past three decades, companies and consumers benefited from cross-border connections that kept a steady supply of electronics, clothes, toys and other goods so abundant it helped prices stay low.
But as the pandemic and the war in Ukraine continue to weigh on trade and business ties, that period of plenty appears to be undergoing a partial reversal. Companies are rethinking where to source their products and stocking up on inventory, even if that means lower efficiency and higher costs. If it lasts, such a shift away from fine-tuned globalization could have important implications for inflation and the world’s economy.
Economists are debating whether recent supply chain turmoil and geopolitical conflicts will result in a reversal or reconfiguration of global production, in which factories that were sent offshore move back to the United States and other countries that pose less of a political risk.
If that happens, a decades-long decline in the prices of many goods could come to an end or even begin to go in the other direction, potentially boosting overall inflation. Since around 1995, durable goods like cars and equipment have tamped down inflation, and prices for nondurable goods like clothing and toys have often grown only slowly.
Those trends began to change in late 2020 after the onset of the pandemic, as shipping costs soared and shortages collided with strong demand to push car, furniture and equipment prices higher. While few economists expect the past year’s breakneck price increases to continue, the question is whether the trend toward at least slightly pricier goods will last.
The answer could hinge on whether a shift away from globalization takes hold.
“It would certainly be a different world — it might be a world of perhaps higher inflation, perhaps lower productivity, but more resilient, more robust supply chains,” Jerome H. Powell, the Fed chair, said at an event last month when asked about a possible move away from globalization.
Still, Mr. Powell said, it’s not obvious how drastically conditions will change. “It’s not clear that we’re seeing a reversal of globalization,” he said. “It’s clear that it’s slowed down.”
The period of global integration that prevailed before the pandemic made many of the things Americans buy cheaper. Computers and other technology made factories more efficient, and they chugged out sneakers, kitchen tables and electronics at a pace unmatched in history. Companies slashed their production cost by moving factories offshore, where wages were lower. The adoption of steel shipping containers, and ever larger cargo ships, allowed products to be whisked from Bangladesh and China to Seattle and Tupelo and everywhere in between for astonishingly low prices.
But those changes also had consequences for American factory workers, who saw many jobs disappear. The political backlash to globalization helped carry former President Donald J. Trump into office, as he promised to bring factories back to the United States. His trade wars and rising tariffs encouraged some companies to move operations out of China, although typically to other low-cost countries like Vietnam and Mexico.
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The pandemic also exposed the snowball effect of highly optimized supply chains: Factory shutdowns and transportation delays made it difficult to secure some goods and parts, including semiconductors that are crucial for electronics, appliances and cars. Shipping costs have soared by a factor of 10 in just two years, erasing the cost savings of making some products overseas.
Starting late in 2020, prices for washing machines, couches and other big products jumped sharply as production limitations collided with high demand.
Inflation has only accelerated since. Russia’s invasion of Ukraine has further snarled supply chains, raising the prices of gas and other commodities in recent months and helping to push the Fed’s closely watched inflation index up 6.6 percent over the year through March.
That is the fastest pace of inflation since 1982, and price gains are touching the highest level in decades across many advanced economies, including the eurozone and Britain.
Many economists expect price increases for durable goods to cool substantially in the months ahead, which should help calm overall price gains. Data from March suggested that they were beginning to moderate. Rising Fed interest rates could help temper buying, as borrowing to buy cars, machines or home improvement supplies becomes more expensive.
But there are still questions about whether — in light of what companies and countries have learned — major products will return to the steady price declines that were the norm before the coronavirus.
It’s not clear yet to what extent factories are moving closer to home. A “reshoring index” published by Kearney, a management consulting firm, was negative in 2020 and 2021, indicating that the United States was importing more manufactured goods from low-cost countries.
But more firms reported moving their supply chains out of China to other countries, and American executives were more positive about bringing more manufacturing to the United States.
Duke Realty, which rents warehouse and industrial facilities in the United States, expects the change to be a source of demand in years to come, though the reworking may take a while. Customers are “now future-proofing their supply chains,” Steve Schnur, the firm’s chief operating officer, said on an earnings call last week.
“Some reshoring is occurring — let’s make no mistake about that,” Ngozi Okonjo-Iweala, the director general of the World Trade Organization, said in an interview. But the data show that most businesses are mitigating risk by building up their inventories and finding additional suppliers in low-cost countries, Dr. Okonjo-Iweala said. That process could end up integrating poorer countries in Africa and other parts of the world more deeply into global value chains, she said.
Janet L. Yellen, the Treasury secretary, said last month that supply chains had proved too vulnerable given the pandemic and the war in Ukraine, and urged a reorientation around “a large group of trusted partners,” an approach she called “friendshoring.”
The approach might result in some higher costs, she said, but it would be more resilient, and a large enough group would allow countries to maintain efficiencies from the global division of labor.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Where is inflation headed? Officials say they do not yet see evidence that rapid inflation is turning into a permanent feature of the economic landscape, even as prices rise very quickly. There are plenty of reasons to believe that the inflationary burst will fade, but some concerning signs suggest it may last.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
“Our supply chains are not secure, and they’re not resilient,” Ms. Yellen said, adding, “that’s a threat that needs to be addressed.”
Ford Motor, which has grappled with pandemic supply chain issues, is working on making its own batteries — including in America. “In the medium and long term, securing raw materials, processing, precursor and refinement and setting up battery production here in the U.S. and around the world is a big work statement for us,” Jim Farley, the company’s chief executive, said on an earnings call last week.
Companies are also beginning to face pressure to price in the true cost of carbon emissions from shipping parts, which could prompt them to move factories closer to consumers.
Scott N. Paul, president of the Alliance for American Manufacturing, said economic and political risks along with carbon-cost calculations were encouraging companies to gradually shift their manufacturing closer to the United States.
“I only see that trend accelerating,” he said.
Long-run population changes could also compound the effects of a slowdown or pullback in globalization, pushing up prices by making labor more expensive. By 2050, one in six people worldwide will be older than 65, according to United Nations estimates, up from one in 11 in 2019.
That aging means that, after decades in which a newly global pool of labor made employees cheap and easy to find, recent world-spanning labor shortages could last. That could push up wages, and companies may pass elevated labor costs along to customers by raising prices.
“Demography and the reversal of globalization mean that a great deal of it is likely to be permanent — clearly not all,” Charles Goodhart, an emeritus professor at the London School of Economics, said of pandemic-era price and labor issues. Mr. Goodhart co-wrote a book in 2020 arguing that the world was on the cusp of a demographic reversal.
“There will be structural forces raising inflation for probably the next two to three decades,” he said.
Some disagree. Adam Posen, president of the Peterson Institute for International Economics, pointed out that plenty of workers were available in parts of South Asia, Africa and Latin America. And inflation has been weak in Japan for decades, despite its much older population.
Nor would a decline in globalization necessarily add to inflation in the long run, he said. By slowing growth, it could lead to less demand and price increases.
But the intertwined trajectory for globalization, goods prices and inflation on the whole will be one that economists watch closely.
“People used to say it’s the million-dollar question, but I guess these days it’s the billion- or trillion-dollar question,” said Carlos Viana de Carvalho, a former New York Fed economist who is now head of research at the Brazilian asset management firm Kapitalo Investimentos. It’s possible, but not definite, he said, that the world is moving into a new economic era marked by higher inflation amid the changes to global integration and intensifying climate concern.
“These things are very hard to identify in real time,” he said.
Alan Rappeport contributed reporting.