The UK has seen the fastest growth in inflation in 30 years with CPI for the 12 months to April 2022 hitting 9%. Whilst earnings growth including bonuses of 5.4% is failing to keep pace with the CPI increase leading to a real earnings cut. Therefore, rampant inflation is increasing the cost of essentials which are based on indexation such as energy, train fares and phone bills. At the same time central banks are trying to curb inflation by raising interest rates which have increased the cost of borrowing. This effect isn’t purely being felt by the consumer but also by producers.
According to the CBI 82% of UK manufacturers expect to raise prices over the coming months. With the headline rate of output prices increasing 14% year-on-year to April 2022 whilst input prices have increased 18.6% year-on-year to April 2022. Therefore, producers are being pressured into passing rising costs to a more cost-conscious consumer which has less disposable income available to them. These issues have plunged consumer confidence to the lowest levels seen since the financial crisis and initiated a cost-of-living crisis.
Causes
The underlying causes of inflation are numerous and end-to-end supply chains have been severely impacted. Inflationary pressures from a competitive labour market have led to wage increases in order for firms to retain and obtain talent. Transport costs remain elevated and the risk of blockages remain high as shown by the issues at the channel crossing which have led to a loss of earnings. The Russia-Ukraine conflict has worsened material shortages and increased the prices of commodities and materials such as wheat, fertilisers, sunflower oil and grain and according to the UN food price index, food prices have increased 34% year-on-year.
The resurgence of Covid and continued lockdown measures in Shanghai have led to production stoppages at firms such as Pegatron which is a major producer of Apple’s iPhone. This has led to calls from industry warning that supply chains will come to a complete halt if the city did not resume production by next month. This has forced the Chinese government to react and support over 600 businesses in restarting their production lines. These issues broadly affect all industries, and the use of direct intervention shows the need to reduce the risk of knock-on effects on an already fragile interconnected global supply chain. Therefore, visibility is key to ensuring supply chain risks are managed effectively.
What can businesses do?
To remain agile and excel in the current and future supply chain landscape, businesses need to prioritise the following:
- Mitigate rising costs to reduce the burden on cost-sensitive consumers
- Ensure security of supply and supply chain resilience to ensure goods get to the end consumer
- Increase control of the supply chain through better visibility and planning
- Shorten supply chains
- Supply chain rationalisation / diversification depending on the state of the supply chain
It is not all doom and gloom, and we can help organisations to navigate through these uncertain times. Our team at 4C Associates combines extensive knowledge and experience with the latest process and technology innovations to provide our clients with transformative solutions and sustainable commercial outcomes. Please contact Gopal Iyer, Head of Supply Chain Practice at 4C Associates at gopal.iyer@4cassociates.com if you would like to understand more about how we can help you to manage costs and to improve your supply chain’s resilience.
