Tim Hoyle, CFA, Chief Investment Officer
thoyle@haverfordquality.com

Retail Sales Put an Exclamation Point on Supply Chain Issues

Inflation has become one of the top concerns among investors, consumers, and politicians. These valid concerns are exacerbated by above-the-fold stories of the fractured global supply chain. Reverting to the simplest definition of inflation — “too much money chasing too few goods” — frail supply chains and inflation are intrinsically linked. And if inflation is to be merely transitory, then we need to have confidence in our supply chains. It does no good for everyone to believe they need to buy their Christmas presents now to ensure the latest LEGO kit is in-hand for gifting in December.

A recent Slate.com1 article sums it up:

If you look at the bigger picture, it becomes clear the problems in the U.S. largely flow from one key factor: We are simply buying an enormous amount of things.

“We’ve spent decades optimizing supply chains to carry a very specific amount of cargo during very specific times of the year across very specific modes of transportation,” says Nathan Strang, an expert on ocean trade logistics at the supply chain tech and consulting firm Flexport. “As soon as we exceeded the design capacity of those systems, it broke.”

Retail sales data released last Friday highlights how we are buying things at more than double the usual rate. This deluge of demand, coupled with continued pandemic restrictions, lockdowns, and mandates, has temporality broken the supply chain and fueled inflationary pressures.

Graph - "2 Yr Annualized Changed in Retail Sales". The x-axis represents the timeline, while the y-axis shows the percentage change in retail sales. The graph illustrates fluctuations in the annualized growth rate of retail sales, indicating that we are buying things more than double the usual rate in 2020 -2021.

During the pandemic, Americans postponed a significant amount of spending (as illustrated by the heightened savings rate). Money not spent on restaurants, vacations, and other services is now being spent on goods at an extraordinary rate. I never want to underestimate Americans’ retailing prowess, but retail sales growth will eventually revert to more normal levels as excess savings are spent. When this occurs, it is probable that inflation and the supply chain issues will dissipate.

1 https://slate.com/business/2021/10/supply-chain-shortages-retail-united-states-explained.html