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38 PCB007 MAGAZINE I JULY 2021 misrepresent how quickly prices are acceler- ating. is effect will fix itself in the coming months as year-over-year comparisons nor- malize. It's also why I like to look at two-year- over-two-year figures. Misaligned Supply Chains As I illustrated above, year-over-year price increases (and therefore base year effects) are only part of the story. Supply chains in disequi- librium are another reason prices are up. is is especially true for transportation and logis- tics costs. Roughly half of airfreight capaci- ty is in the belly holds of commercial airlines. When passengers stopped flying, and espe- cially when international flights all but disap- peared, airfreight capacity declined right along with it. Seat capacity is still down 40% globally. While domestic travel is picking up, it will be years before international travel returns to pre- pandemic levels. Waterborne transportation costs are also up. e Shanghai Containerized Freight In- dex is up 291% over the last year and up 357% compared to two years ago. Container rates were never higher than $3,000 prior to 2020, but the Drewey composite index exceeded $5,000 for the first time in 2021. On some routes, like China-Rotterdam, the average rate has moved above $10,000. I expect logistics and transportation costs will remain elevated well into next year. Pent-up Demand Normally during a recession consumers cut back spending on durable goods—things like cars, appliances, and electronics. Rather than replace these items, consumers oen try to ex- tend the useful life of these products when eco- nomic growth is slow. ink about getting an extra six months out of your clothes dryer or another year from your car. When money is tight, consumers typically have focused on ser- vices over goods. But this recession has been unique on many fronts. Services closed due to COVID mandates and while quarantining at homes, consumers opted to spend on goods. Moreover, massive fiscal stimulus ensured that money was not tight in aggregate. Real dispos- able income is up 9% from pre-pandemic lev- els but is flat when government transfers are excluded. ese forces combined to create tre- mendous demand for electronics. In the U.S., spending on durable goods has been above pre- pandemic levels since June 2020, only months aer the pandemic hit. Spending on durable goods is 25% higher than it was pre-pandemic. Spending on services remain down 4%. And remember, all this demand came at a time when supply chains were misaligned, and transportation networks were in disarray. is created shortages and pushed out lead-times. Excess demand combined with shortages and longer lead-times to push prices higher. As the economy reopens, spending on ser- vices is coming back. Restaurants are filling up. Traffic is returning. Stadium attendance is growing to capacity. Broadway (NYC) is open- ing. e return of services could potentially slow the sale of consumer durables. e pro- verbial two-edged sword will cut both ways. Price pressure will ease but so will demand. Already we've seen demand slow as supply constraints have curtailed production and led to higher prices. Some consumers are taking a wait-and-see approach. is is just one of the fallouts of higher prices. Higher prices can hurt demand temporarily if buyers decide to hold off until prices come down. e opposite is the case if consumers and businesses believe these price increases are more permanent in nature. When inflation is rising, and it looks like price increases are likely to be more permanent, buyers want to pull demand forward so they can lock in the lower price. It doesn't seem like this is currently the case, but it is something to watch for. Another fallout of higher prices is weaker margins. While it's nice to suggest we can pass prices on, that isn't always the case. More real- istically, manufacturers will at best be able to pass on some cost increases.

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