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Global Stagflation: Supply-Chain Disruptions Could Last a While

Supply-Chain
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EDITOR NOTE: Economist Mohamed El-Erian says the current supply-chain disruptions around the globe are here to stay for at least 1-2 more years. In a Financial Times op-ed, El-Erian explains that more and more CEOs are coming to share this belief, which will have a compounding economic effect. He writes, “Fewer chief executives have confidence that such disruptions are temporary and quickly reversible. This will restrain growth plans despite robust demand, and increase pressure to raise prices to offset higher costs." The slower growth and higher costs may “bring a return to a 1970s-style stagflationary environment,” which could wipe out so much of the wealth that many average Americans have built up in the last few decades.

Mohamed El-Erian said supply chain disruptions around the world are set to continue for a few years, and warned high prices across economies could bring a return to a 1970s-style stagflationary environment.

Due to the compounding effects of more than a year of supply-chain shocks, small businesses everywhere continue to face shortages and delays of key resources.

These issues will disrupt corporate and policy plans, and could undermine investment, given that massive stimulus from central banks has pushed many markets to record highs, the veteran economist said in a Financial Times op-ed on Monday.

Data last week showed US producer inflation posted its biggest annual gain in nearly 11 years in August, indicating pressure on companies to pass further price increases onto consumers.

"The culprit is some mix of disrupted supply chains, high transportation costs, container scarcity and congested ports," El-Erian wrote, and pointed to labor shortages that are forcing manufacturing and service-related companies having to battle with rising wage pressures.

"Fewer chief executives have confidence that such disruptions are temporary and quickly reversible. This will restrain growth plans despite robust demand, and increase pressure to raise prices to offset higher costs," he added.

El-Erian noted there are some factors at play that could reverse the effects of multiple coronavirus-driven waves on supply-chain issues, such as shutdowns of destination ports.

"Such reversible factors are accompanied by supply side troubles that could last for one to two years, if not more," he said, adding that companies will only factor in the impact of short-term disruptions when revising their supply chain management to incorporate resilience.

He also said tightness in the labor market is unlikely to pass soon because companies will adapt to dealing with worker shortages.

"Added to inflation already in the pipeline, all this translates into stagflationary winds for the global economy that are unfamiliar to those that did not live through the 1970s," he said. "It is a scenario that more companies are putting front and centre in their planning. Yet too many policymakers and, therefore, market participants lag behind realities on the ground."

El-Erian presented a unique dilemma the Federal Reserve now faces - having to taper massive asset purchases due to high inflation levels, or deciding against doing so due to lower economic growth. This could be an issue for "many asset classes" where valuations represent a sizeable bet on the outcome of central bank support, he said.

"It is so much better for companies and policymakers to adjust now," El-Erian said. "Containing further disruptions is cheaper and easier than having to clean up the damage."

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