Monday, April 25, 2022

How Much Would You Expect Prices to Increase in a Bidding War?

 Too many people outside of business are blaming the wrong people for the decades-high levels of inflation—usually the government and central bank and “greedy” corporations. Especially politicians forget Economics 101 and basic market dynamics. When more people want to buy a limited amount of goods and services, it becomes a bidding war where customers (aka businesses) start bidding up the price to get preferential treatment. We’ve all heard that since there’s a shortage of houses on the market, sellers are getting more than the asking price, getting all-cash deals, getting other perks thrown in, and so on. Less financially endowed buyers are left in the cold. Imagine in business-to-business (B2B) markets sellers are getting above the asking price and less financially endowed companies are left in the cold. That’s just a simple example of what’s happening on a global scale.

  • Raw material “shortages”: demand for basic and specialty metals—copper, platinum, rare earths, etc.—is exceeding supply either because of inherent capacity or shutdowns due to missing spare parts for mining equipment or lockdowns due to miners’ illnesses or capacity curtailment because the labor pool isn’t sufficient for replacing retired workers.
  • Processing “shortages”: see all the reasons above
  • Intermediary parts “shortages”: see all the reasons above
  • Repair and all other service curtailments: see labor reasons above contributing to spare parts’ shortages
  • Transportation “shortages”: see all the reasons above for imports, exports, domestic transfer between points and modes of transportation, warehouse transfers and especially “last mile” deliveries
  • And so on, and so on, and so on…
If you’re in a bidding war for employees—and all of us are in these days of “full employment”—and we’re in a bidding war for conveyances and processing and services, how can we not be in a period of inflation?

So what’s the solution? It’s a global problem that requires a global solution. The US can ease immigration restrictions to get more people here. They can ease some regulations that ease the flow of goods. They can on-shore some capabilities. But where do the workers and equipment come from to open new mines, facilities, ports, warehouses, etc.?

New York Times articleExecutives at 141 oil companies surveyed by the Federal Reserve Bank of Dallas in mid-March offered several reasons for why they weren’t pumping more oil. They said they were short of workers and sand, which is used to fracture shale fields to coax oil out of rock. But the most salient reason — the one offered by 60 percent of respondents — was that investors in oil companies don’t want companies to produce a lot more oil, fearing that it will hasten the end of high oil prices.

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