Shortages Are Relative

Demand Shock

Low Teens Inflation?

Aging Society

About That Supply Chain

Dallas, Lake Granbury, and New York

In some simplistic economic theories, shortages never happen. Supply and demand for any particular good are always perfectly balanced in a given time and place. If you can’t get what you demand at that moment, you pay a higher price or you demand something else.

But that’s theory. The real world doesn’t respond instantly, so we have these frustrating periods when producers have more widgets than they can give away, or consumers can’t get the widgets they need at any price. And in an increasingly specialized world, substitution is no longer as easy as it once was. That car you want needs a specific microchip or it’s worthless. No other chip will work. Hence the present shortages, higher prices, and growing inflation.

Nevertheless, there’s no widget shortage if no one wants widgets. Shortages appear when demand for a good rises faster than suppliers are able and/or willing to produce it. They recede when demand falls faster than supply. Shortages exist only relative to demand.

This is important to understanding why inflation is up and ports are so clogged. Is it because we are demanding more, or because our trading partners are supplying less? Remember the relative change is what matters. Higher supply won’t stop prices from rising if supply still lags demand.

Obviously, this varies for different products. Generally, though, I think the data shows demand growth is the bigger factor. Today we’ll look at some recent analysis and try to see how all these moving parts fit together. It matters to the inflation outlook… which affects everything.