chained-money

Hooking a Chain onto Inflation

Artificial trade barriers threaten inflationary effects on the economy.

An interesting perspective has been recently pointed out that I honestly hadn’t put much thought to until now that “Global Supply Chains Contain Inflation.” This report and a number of others mention that the global supply chain has put persistent downward pressure on prices and therefore, governments around the world that are reconsidering their participation in free trade (sound familiar?) should realize that withdrawal could come at a high cost.

While monetary policy has deservedly been given a lot of the credit for limiting inflation over the past 25+ years, the growth of the global market seems to actually have had a potentially greater impact. In the U.S., government borrowing (i.e., national debt) was supposed to fuel inflation, but it hasn’t. Counteracting this is the abundance of inexpensive consumer goods imported from Asia as well as less expensive raw and intermediate materials sourced globally (and a relatively low price of fuel as an added incentive for global trade).

It is safe to say that international trade leads to competition at a global level and tends to push down prices of domestically produced goods, and even the threat of cheaper imported substitutes keeps a lid on domestic production costs. That can partially explain wage stagnation a bit as, like the cost of any other factor of production, wage growth—and its impact on overall inflation—is also kept in check through this mechanism.

I think that this effect isn’t only due to the availability of global trade, but also a company’s ability to use technology and process improvements, such as Lean and Six Sigma, to improve the agility and efficiency of their supply chains and operations functions. This has enabled global trade to keep growing. So, any activities that can put a damper on these effects—such as artificial trade barriers and other economic uncertainty, significant fuel price increases, environmental disasters and terrorism—could also result in increases in inflation.

TAGS: Trade
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