Increasing Prices From Global Shortage of Computer Chips
by Rob Stoll, CFP®, CFA Financial Advisor & Chief Financial Officer / May 6, 2021
Our dishwasher broke two weeks ago. In looking for a new one, we looked at the websites of all the major appliance retailers you can think of. A theme quickly emerged: “Out of Stock.” If you’ve been in the market for an appliance or car, you may have noticed that inventories are low and prices are much higher. You can thank a global shortage of computer chips for these increasing prices. What’s going on, and how does this chip shortage affect the economic outlook?
What’s Causing the Chip Shortage?
The COVID-19 pandemic is arguably one of the most disruptive economic events in our country’s history. The economy was humming along at a strong pace until COVID arrived on the scene, at which point activity came to a screeching halt. Companies reacted by reducing production, and trade routes were disrupted.
Surprisingly, one of the biggest users of computer chips is the automotive industry. Facing a collapse in demand last year, auto makers cut production dramatically. With the economy roaring back to life and consumers flush with stimulus money, demand has come roaring back. Auto makers are trying to ramp up production but quickly find that there aren’t enough chips to build cars!
Adding to the global chip shortage is surging demand for electronics. As more people work from home, many are finding they need new monitors, computers, and printers.
As this demand couples with a recovery in economically sensitive parts of the economy, it’s creating a perfect storm of demand far out-stripping chip supply.
Impact of Global Chip Shortages: Low Inventories and Higher Prices
The global chip shortage is having a major impact on availability of consumer goods. As mentioned, our search for a new dishwasher was met with countless “out of stock” messages. At one major appliance retailer in the Chicago Suburbs (Abt Electronics) only 25% of dishwashers are in stock. Even worse, only half of those in stock are stainless steel, which most people want. When I asked a retailer what was going on, he said, “there’s no chips to build dishwashers!”
We’re also seeing this chip shortage affect car prices. Ford, BMW, Volkswagen, and others have already warned investors that new car production will be curtailed in 2021. The lack of new car supply has led to a stampede to buy used cars, sending prices to obscene levels.
Finally, Apple has warned that lack of chips will hurt the sales of iPads and iMacs. They expect sales from these products to be $4 billion lower in the third quarter. Clearly, the global chip shortage is having a pervasive impact on many consumer goods we depend on.
How Chip Shortage Affects Your Buying Decisions
If you’re in the market for a car, appliance, or some other consumer good, you’re likely going to face a choice. You’ll either have to pay up to get the good now, or you can defer the buying decision until this global chip shortage resolves itself and prices return to normal.
With our dishwasher conundrum, we ended up having to get a more expensive, top-of-line unit. The cost of not having a dishwasher was higher than the cost of paying up for the Mercedes model (just ask our kids!)
In due time, this chip shortage will resolve itself. The benefit of living in a capitalist society is that if supply/demand gets out of whack and prices rise, business will ramp up production to take advantage of these higher selling prices. Eventually, supply rises and prices come back down. If you’re patient, it’s likely you can avoid paying up for something that will be cheaper in a few months.
Shortages May Lead to New Consumer Inflation Mindset
One of our longer-term worries about this supply shortage is that consumer mindsets are being reprogrammed. It started with toilet paper and sanitizer shortages a year ago. There’s the shortage of homes for sale as mortgage rates have plunged. Now, we have a shortage of consumer goods.
Consumers are facing decision points they haven’t had to think of before. “Do I pay up and buy now, or wait for prices to come down?” Many are opting to pay up in order to get what they want today.
As this mindset takes root, it encourages companies from all walks of life to take advantage. Coca-Cola, Kimberly Clark, and other consumer goods companies have announced price hikes.
Our worry is that events of the last 14 months – combined with a new spending mindset in Washington – are sowing the seeds of future inflation. While we’re not expecting a hyperinflation scenario like we’ve seen in Zimbabwe or Venezuela, higher inflation will take a bite out of consumer budgets if increases in income don’t keep up.
What Can You Do to Avoid Buying Frenzy?
Nearly every time there’s been a buying frenzy in the economy, it’s ended badly for those that got caught up in it. Tech stocks in the 1990s and houses in early 2000s are the most recent examples of consumers getting caught up chasing prices higher.
The biggest thing you can do is to think through major buying decisions before you make them. House prices, for instance, are really high. Do you really need to buy a house now? How long do you think you’ll be in the house? If your family is growing and you expect to stay in the home for a long time, paying up to get a house might be worth it. But if you’re buying a home with the idea of only staying in it a few years, you risk having prices decline in coming years.
For consumer goods, maybe it’s time to bust out that tool box collecting dust in your garage. My repair skills are on-par with someone with two left hands. However, I’ve been opting to fix stuff rather than throwing out something that breaks. You’d be surprised how much you can learn by watching YouTube repair videos.
Finally, whatever path you choose, it’s important to be aware of what’s going on. That’s why we write these weekly blogs – to give clients and consumers an unbiased, real-time view of what’s going on in the world.
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Rob has over 20 years of experience in the financial services industry. Prior to joining Financial Design Studio in Deer Park, he spent nearly 20 years as an investment analyst serving large institutional clients, such as pension funds and endowments. He had also started his own financial planning firm in Barrington which was eventually merged into FDS.