Low Supply Increases Demand
Across the board, we’re seeing the capitalist principles of supply and demand both drive and curb U.S. economic activity. As more people have emerged from their hermit-like existence throughout the past year and a half, consumer spending is shifting from goods to services. For example, the services industry (e.g., restaurants, travel, hospitality) is on the rise thanks to higher vaccination levels nationwide and the holiday season. However, the labor shortage is fueling demand for higher wages and supply chain disruptions are causing higher prices.1
One industry that has benefited from supply-chain shortages is the used-car market.2 First, the microchip manufacturing in Asian countries was delayed due to the pandemic, but now the snarls in shipping and transportation are projected to continue chip shortages used in the production of new vehicles. One analyst predicts a reduction in new vehicle production by 5 million this year, with low inventory continuing through 2022.3 With fewer new cars from which to choose, prices of used cars have skyrocketed.
As low supplies increase demand, higher demand increases prices – that’s the way the capitalist economy is designed to work. Unfortunately, consumers often take the brunt of higher prices, and we may be in for a spell of higher household spending as a result. This can be particularly difficult for retirees who live on a fixed income. As long as interest rates remain low, fixed-income investment vehicles offer lower yields, so we are approaching the uncomfortable sweet spot when income yields do not match spending needs. As always, we are here to help you find ways to supplement retirement income needs. If you are interested in learning more, please feel free to contact us.
Throughout the holiday season, you may have experienced some instances of supply and demand firsthand at the supermarket. Grocers have deployed a variety of strategies to keep customers engaged despite rising prices, the largest of which have been in meats, poultry, fish and eggs.4 You may not have seen the usual barrage of promotions and discount prices, as merchants can’t drop prices on items in which they have low inventory.5 Furthermore, if you see stores with empty shelves, the problem may not be low supplies of food, but rather of packaging. Shortages of plastic and aluminum containers mean that supplies of food simply can’t make it to market because there’s no way to package them.6
As people return to work and start commuting again, they are feeling the weight of higher gas prices as well. Again, this is a construct of supply and demand. During the stay-at-home pandemic, the demand for oil dropped, so production was reduced. Now that it’s rising, it takes a while for new production to reach consumer-demand levels, so we’re feeling the crux of rising prices. However, consumer supply and demand are not the only forces affecting the price of oil. Supply disruptions can result from other factors, such as severe weather conditions, competition and our ability to produce oil independent of other nations.7
1 Lucia Mutikani. Reuters. Nov. 3, 2021. “U.S. services sector index jumps to record high; private payrolls beat expectations.” https://www.reuters.com/article/usa-economy-employment/u-s-services-sector-index-jumps-to-record-high-private-payrolls-beat-expectations-idUSKBN2HO1FU. Accessed Nov. 3, 2021.
2 Anne Sraders and Lance Lambert. Yahoo Finance. Nov. 1, 2021. “What to expect in the 2022 used car market.” https://finance.yahoo.com/news/used-car-prices-roof-might-110000814.html. Accessed Nov. 3, 2021.
3 Stefano Rebaudo. Reuters. Nov. 3, 2021. “Supply chain disruption: is the worst over?” https://www.reuters.com/article/global-markets-supply/supply-chain-disruption-is-the-worst-over-idUSKBN2HO1LM. Accessed Nov. 3, 2021.
4 Kimberly Cheng and Sareen Habeshian. KTLA. Nov. 2, 2021. “Grocery prices are up this Thanksgiving amid labor and supply shortages.” https://ktla.com/news/local-news/grocery-prices-are-up-this-thanksgiving-amid-labor-and-supply-shortages/. Accessed Nov. 3, 2021.
5 Mary Hanbury. Business Insider. Nov. 1, 2021. “Some grocery stores have scrapped promotions and discounts to help curb demand for scarce products amid the supply chain crisis.” https://www.businessinsider.com/supply-chain-crisis-grocery-stores-cut-discounts-promotions-curb-demand-2021-11. Accessed Nov. 3, 2021.
6 Carsyn Currier. KOLD. Nov. 3, 2021. “Supply chain issues result in some empty grocery store shelves as holidays approach.” https://www.kold.com/2021/11/03/supply-chain-issues-result-some-empty-grocery-store-shelves-holidays-approach/. Accessed Nov. 3, 2021.
7 US Energy Information Administration. Oct. 5, 2021. “Natural gas explained.” https://www.eia.gov/energyexplained/natural-gas/factors-affecting-natural-gas-prices.php. Accessed Nov. 3, 2021.
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The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.
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