Sunday, August 7, 2022

How the pandemic affected the economy: from empty shelves to higher prices

Since the beginning of the pandemic, consumers and retailers have faced shortages of a wide range of goods, from toilet paper to electronics. Economists and policymakers have highlighted the role that supply disruptions due to COVID can play in fueling price rises.

But there is still little empirical evidence to support the magnitude of the shortfalls in various categories of consumer goods and their impact on retail prices and inflation.

Our new study of large retailers with both online and brick-and-mortar stores provides a more detailed picture of the nature of scarcity and its relationship to rising prices.

Facts

Inflation eased slightly at the start of the pandemic, but then recovered and rose rapidly in the United States, as well as in many other countries. In the US, inflation rose to 5.3%, according to the Labor Department’s CPI, in the 12 months to August 2021, after averaging around 1.7% over the past decade. The reasons for this spike in inflation have been widely discussed (see here and here). Product shortages and supply disruptions are one potential source of price increases.

Globally, the pandemic has caused bottlenecks in transport networks and disrupted the flow of goods through international supply chains. Domestically, the pandemic has increased the cost of doing business and undermined retailers’ inventory management efforts amid volatile consumer demand.

READ MORE: US consumer prices have risen 6.2 percent over the past year, the highest inflation since 1990.

These difficulties can lead to higher production costs, difficulties in restocking and product shortages, and lead retailers to pass costs onto consumers in the form of higher prices.

The widespread shortage of goods at the beginning of the pandemic affected almost all categories of consumer goods. Using online data collected in seven countries from a sample of large retailers who also have brick-and-mortar stores, we track changes in availability and prices for a wide range of products.

In our sample of US retailers, the average overall shortfall for certain types of items (situations where retailers no longer had these items to sell) rose from about 14% of items in 2019 to over 35% in early May 2020.

The magnitude of the increase in deficit varied across product categories, from 19 percentage points for Furniture and Household items to over 50 percentage points for Food and Beverage products in May 2020 (see chart).

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Over time, the deficit has evolved from a “temporary deficit” in many sectors to a “permanent deficit” concentrated in fewer sectors. From our data, we can determine when product shortages are expected to be temporary — as retailers post reports that a product is “currently unavailable” and more persistent, such as when a product is discontinued and disappears from product lists.

In the United States, temporary deficits that are more visible to consumers rose rapidly from 12% to 22% in March 2020 and then gradually recovered over time. By November, the temporary deficit had returned to pre-pandemic levels and continued to decline in the following months.

The permanent shortage of products also increased sharply at the beginning of the pandemic, but in contrast to the temporary shortage, it continued to grow: initially, by the end of April 2020, about 20% of production was discontinued; After contracting in July, the persistent deficit began to widen again, and by May 2021, it peaked again by about 20 percentage points from pre-pandemic levels.

While the availability of most product categories has gradually recovered in the United States, disruptions have been more persistent in the electronics and food and beverage categories. Electronic goods, particularly impacted by the global shortage of computer chips, have risen sharply since October 2020 and reached a near-record high in May 2021, with a shortage of more than 40 percentage points from pre-pandemic levels.

As of May 2021, the deficit in the food and beverage sector also remained more than 30 percentage points higher, in line with articles in the US media reporting the impact of labor and raw material shortages on the sector.

Is this shortage of products related to rising prices? At the country level, we observe that the three countries that experienced the most sustained deficits in our sample – the United States, Canada, and Germany – also experienced larger increases in annual inflation rates during this period. In our sample of goods in the United States, we found that the effect of deficits on inflation is statistically significant, but gradual and ultimately temporary.

READ MORE: Heating bills to rise as inflation hits energy prices

For example, we estimate that an increase in the share of discontinued products within a narrow product category, measured by a persistent shortage of goods from 10% to 20%, initially increases monthly inflation by about 0.10 percentage points for that category. goods. Exposure gradually increases after two weeks, peaks after about 6 weeks, and disappears after three months.

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The impact is higher in sectors where commodity shortages have been particularly persistent, such as food processing and electronics. We also found that temporary deficits, which were more important at the start of the pandemic, have a similar effect on price inflation for the category in which they occurred. This suggests that costs have kept upward pressure on prices all the time, even though the effects were more difficult to detect with aggregate statistics when demand fell.

The inflationary effects we find in these online prices are likely to spill over to regular prices because online and offline prices are similar for major US retailers.

What does it mean

One of the most striking economic consequences of the global COVID-19 pandemic is the serious disruption in the supply of goods to end consumers. Temporary disruptions were widespread and could easily be spotted by consumers on empty shelves and “temporary out of stock” notices that prevailed at the start of the pandemic.

While temporary shortages have tended to disappear, our research shows that supply disruptions have continued, and the proportion of permanently discontinued goods concentrated in certain categories has increased. Indeed, COVID supply disruptions, which manifest in product shortages at the retail level, continued to be an important factor in inflation a year after the onset of the crisis.

Although the impact of food shortages on inflation that we are seeing is temporary and only lasts about 3 months, the fact that food shortages persist in some sectors means that the pressure on prices from the shortage has not stopped. Looking ahead, the forecast for US inflation depends in part on how quickly the deficit disappears.

This story was originally published by Econofact on October 7, 2021.

Editor’s Note: The analysis presented in this cheat sheet is based on: Cavallo A. and Krivtsov O. “What can scarcity tell us about inflation? Evidence from Online Microdata, ”Working Paper NBER 29209, September 2021.

Nation World News Desk
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