Are the days of cheap and abundant products soon over?

Over the past three decades, businesses and consumers have benefited from cross-border connections that have helped maintain a steady supply of electronics, clothing, toys and other goods so plentiful that it has helped keep prices low.

But as the pandemic and the war in Ukraine continue to weigh on trade and business relations, this period of plenty seems to be experiencing a partial reversal. Businesses are rethinking where their products come from and building up inventory, even if it means lower efficiency and higher costs. If it lasts, this reversal from well-regulated globalization could have significant consequences for inflation and the global economy.

Economists question whether recent supply chain disruptions and geopolitical strife will lead to a reversal or reconfiguration of global production, in which offshored factories will return to the United States and other countries with less political risk. .

If that happens, the decades-long decline in prices for many goods could come to an end or even begin to reverse, potentially boosting global inflation. Since about 1995, durable goods such as cars and equipment have held back inflation, and the prices of non-durable goods such as clothing and toys have often risen only slowly.

These trends began to change in late 2020, after the onset of the pandemic, when shipping costs soared and shortages were met with high demand to drive up the prices of cars, furniture and equipment. While few economists expect last year’s dizzying price increases to continue, the question is whether the trend of goods prices rising, at least slightly, will last.

Reversal of globalization?

The answer may depend on how globalization evolves.

“It would definitely be a different world – one where inflation might be higher, productivity might be lower, but supply chains might be more resilient and robust,” Jerome Powell said. , chairman of the Federal Reserve, at an event last month when asked about a possible abandonment of globalization.

Yet, according to Mr. Powell, it is not clear how radically conditions will change. “It is not clear that we are seeing a reversal of globalization,” he said. “It is clear that she has slowed down. »

The period of global integration that prevailed before the pandemic has made many of the things Americans buy cheaper. Computers and other technologies made factories more efficient, and they produced sneakers, kitchen tables and electronics at a rate unprecedented in history. Companies have reduced their production costs by relocating their factories abroad, where wages are lower. The adoption of steel containers and ever-larger freighters has made it possible to ship products from Bangladesh and China to Seattle and Tupelo, Mississippi, and everywhere else, at surprisingly low prices.

But these changes have also had consequences for American factory workers, who have seen many jobs disappear. The political backlash from globalization helped bring former President Donald Trump to power as he promised to bring factories back to the United States. Its trade wars and rising tariffs have encouraged some companies to shift operations out of China, though generally to other low-cost countries like Vietnam and Mexico.

Supply chains

The pandemic has also highlighted the snowball effect of highly optimized supply chains: factory closures and transport delays have made it difficult to obtain certain goods and parts, including the semiconductors essential to electronics, household appliances and cars. Shipping costs have increased tenfold in just two years, erasing the savings made by manufacturing certain products overseas.

From the end of 2020, prices for washing machines, sofas and other large products surged as production limits came up against strong demand.

Inflation has only accelerated since then. Russia’s invasion of Ukraine has further disrupted supply chains, driving up gas and other commodity prices in recent months and helping to push up China’s inflation index. Fed, closely watched, by 6.6% on the year to March.

It is the fastest pace of inflation since 1982, and price rises are at the highest level in decades in many advanced economies, including the eurozone and Britain.

Many economists expect durable goods price increases to slow significantly in the coming months, which should help calm the overall rise in prices. March data suggested it was beginning to moderate. The Fed’s interest rate hike could help dampen buying as it becomes more expensive to borrow to buy cars, machinery or home improvement products.

But it’s still debatable whether, in light of what companies and countries have learned, major commodities will return to the steady price drops that were the norm before coronavirus.

It is not yet clear how close the factories are to home. An “offshoring index” published by Kearney, a management consulting firm, was negative in 2020 and 2021, indicating that the United States was importing more manufactured goods from low-cost countries.

But more companies said they had shifted their supply chains from China to other countries, and US leaders were more positive about bringing more manufactured goods to the United States.

Demographic upheaval

Long-term demographic changes could also aggravate the effects of a slowdown or setback in globalization, pushing up prices by making labor more expensive. By 2050, one in six people in the world will be over the age of 65, according to United Nations estimates, up from one in eleven in 2019.

This aging means that after decades in which a new global pool of labor made employees cheap and easy to find, recent global labor shortages could last. This could lead to higher wages, and companies could pass on high labor costs to their customers by raising prices.

“Demography and the reversal of globalization mean that much of this is likely to be permanent – ​​but not all of it,” observes Charles Goodhart, professor emeritus at the London School of Economics, of the problems. of pandemic-era prices and labor. Mr Goodhart co-wrote a book in 2020 in which he argues the world is on the cusp of a demographic reversal.

Some disagree. Adam Posen, president of the Peterson Institute for International Economics, points out that many workers are available in parts of South Asia, Africa and Latin America. And inflation has been low in Japan for decades, despite a much older population.

Moreover, a decline in globalization would not necessarily worsen inflation in the long run, he adds. By slowing growth, it could lead to lower demand and higher prices.

But economists will closely monitor the intertwined trajectory of globalization, commodity prices and inflation as a whole.

“People used to say that was the million dollar question, but I guess nowadays it’s the billion or the trillion dollar question,” Carlos Viana de Carvalho said. , a former New York Fed economist who is now head of research at Brazilian asset management firm Kapitalo Investimentos. He said it is possible, but not certain, that the world will enter a new economic era marked by higher inflation amid shifting global integration and heightened climate concerns.

“These things are very difficult to determine in real time,” he concludes.

This article was originally published in The New York Times.