As the fourth quarter gets underway, the U.S. economy continues to struggle with supply chain issues. As a result, we are also struggling with rising prices and a wavering certainty about the meaning of the word "transitory."
Resin prices are much higher than they were last year at this time, due to the sharp run up in the price of energy products. And the prices for other commodities are also well above the levels of a year ago. I do not yet feel the situation is urgent, but if they continue, these trends represent significant risks to the current recovery in both the plastics industry and the overall economy.
More specifically, I believe these trends represent three risks to the outlook that must be acknowledged. First, rising energy prices are similar to a tax on consumers and businesses. Every dollar spent on energy products is a dollar not spent on other goods and services. The heating season is just around the corner, and very soon prices for heating fuels will join gasoline as a frequent and "top of mind" consumer purchase. If prices continue to rise, confidence levels will weaken.
Second, higher resin prices are putting downward pressure on profit margins for many processors. Demand for most plastics products is still strong, but the prices are rising faster than demand growth. Increasingly, processors are in the position of either swallowing the higher costs or else risk losing business by trying to pass the price increases through to customers.
And third, these broad-based price hikes combined with a corresponding rise in wages may yet be indicative of a bout of inflation that is less transitory and more threatening than policymakers are currently expecting.
I do not have enough space here to describe adequately all of the ways in which high inflation damages an economy, but they are both numerous and severe.
Inflation is highly corrosive to economic growth, and if it gets out of control, the antidote is higher interest rates. In a world in which negative interest rates are common, any increase in interest — either by the Fed or the credit markets — will not be pleasant. As I said, I do not think the situation at this time is urgent. But the risks of higher inflation have escalated in recent months.
The main reason for this is that nobody seems to have a clear picture of how and when the burgeoning problems with this nation's supply chain will be resolved. We all want to believe the current bottlenecks will eventually be resolved, which would render the bulk of the current price increases "transitory." But as always, we have to consider for an alternate hypothesis. In other words, any more unforeseen disruptions and I may start to get anxious.
So my forecast from nine months ago for moderate increases in resin prices in 2021 was on the low side. Or maybe I was just too early. As the chart indicates, the increase in crude oil and resin prices started as the economy emerged from the shutdown in the second quarter of 2020, and as 2021 got started, the curves were accelerating higher.
I acknowledged this acceleration in the column I wrote last February. At that time, I believed the sharp rise in prices was due to supply imbalances caused by the shutdown. I thought there would be some lingering effects of these imbalances but that the supply chain would be able to adjust as this year progressed.