Temperatures aren't the only thing scorching this summer. The U.S. economy is running hot, and so is inflation.
Inflation is a general rise in the price level of an economy over a period of time. In other words, it’s a situation when too much money chases too few goods and services.
Consumer prices today are rising at the fastest rate since the Great Recession and the second-fastest rate since the early 1980s. Prices that suppliers charge businesses and other customers jumped 0.8 percent in May 2021 whereas the average rise between 2017 and 2019 was 0.2 percent.
Inflation impacts every sector of the economy, including healthcare. As supply chain costs account for one-third of provider operating budgets, purchasing leaders in this environment must remain vigilant and, where appropriate, take steps to hedge against rising costs.
So, what are the key reasons behind the current rise in supply and services costs?
Pent-up consumer demand coupled with pandemic-related supply chain challenges are among the main factors driving the current period of higher-than-normal inflation. We explore some of these reasons in-depth below.
Reason #1 – Lockdowns & Labor Shortages
At the pandemic’s height in the spring of 2020, businesses, cities and even entire countries shut down. As COVID-19 lockdowns and surges persisted, it became difficult, or in some cases impossible, for many manufacturers around the globe to find the workers necessary to maintain consistent production levels.
According to the International Labour Organization, workers in four sectors experienced the most “drastic” effects of the pandemic and declining production:
- Food and accommodation (144 million workers)
- Business services and administration (157 million)
- Retail and wholesale (482 million)
- Manufacturing (463 million)
Together, workers in these industries total 37.5 percent of global employment with many pushed to the ranks of the unemployed. And according to IHS Markit the purchasing managers’ indice (PMI) - an indicator that signals the direction of activity in the broad manufacturing and services industries - increased to 62.6 in June, a record high. Alongside an exceptional level of new orders, output decelerated, largely due to difficulties finding suitable workers.
In short: the crisis had a dramatic impact on the world’s workforce and production that we’re still feeling today. Healthcare has also felt the pinch as workers in high-demand labor groups, from nurses to pharmacists to Intensive Care Unit (ICU) physicians, have been in short supply and subject to a more competitive recruiting landscape.
Overall, demand for workers across industries is recovering faster than supply, putting pressure on employers, and pushing wages and prices higher.
Reason # 2 – Global Logistics Backlogs
While many developed countries are making strides in their COVID-19 reopenings and recoveries, developing nations, suppliers and ports that manufacture and ship U.S. goods are still in the trenches of the pandemic. For instance, the Port of Yantian, the world’s fourth-largest container port in the south China city of Shenzen, is partially closed due to a COVID-19 outbreak. Malaysia, the world’s largest exam glove supplier, is currently in lockdown amid a new wave of COVID-19.
Today’s global transportation environment represents a perfect storm of port congestion, vessel shortages, equipment and container shortages, and more. Yantian’s recent port shutdown and backlog, for instance, has escalated Chinese export delays of up to 16 days or more at present and caused major regional congestion as carriers seek alternatives.
Even as Yantian recently resumed full operations, it could take up to a month to work through the backlog of 60-plus inbound ships and approximately 160,000 outbound containers - sending ripple effects across the global supply chain. As a result, Asia-U.S. shipping rates to both coasts are now at least triple June 2020 levels when transoceanic prices had already begun to climb.
And it’s not just shipping that’s backlogged. Land transportation is also stretched thin due to labor, materials and logistics capacity shortages.
Collectively, these transportation disruptions add to container availability issues, and potentially, less overall shipping capacity in the coming months even as demand continues to surge. With upwards of 80 percent of personal protective equipment (PPE) and raw materials for drugs made overseas, the healthcare supply chain can expect delays, longer lead times and the potential for price volatility.
Reason #3 – Raw Materials & Finished Product Shortages
Alongside halted production operations and chaos in global shipping, economies around the world have been plagued by shortages of both raw materials and a vast range of finished goods.
The healthcare supply chain saw massive global demand spikes in 2020 for PPE and therapeutics, leaving many providers scrambling to access these vital supplies needs to protect their employees and care for patients.
Global exam gloves demand today still exceeds existing production capacity by an estimated 40 percent, and availability challenges are expected to persist into late 2022. Raw material scarcity as well as production delays and stoppages have exacerbated ongoing shortages.
The story with gloves is a similar tale for a variety of other shortage products and commodities across the supply chain - from electronics to lumber to food. Supply and demand dynamics are sending prices higher for raw materials and limited commodities, resulting in higher costs of finished goods to the market and pushing inflation to multi-year highs.
As the U.S. economy recovers from the impacts of the pandemic, the collective problems of rising consumer demand, elevated commodity prices, global supply constraints and higher wages are driving inflation, which is expected to continue well into next year – problems that are likely to trickle into the healthcare supply chain.
With healthcare providers already operating on thin margins, rising prices can erode purchasing power and present obstacles to near-term cost reduction and pandemic recovery strategies.
For our part, Premier remains committed to pursuing strategies to help our members get the vital supplies needed to care for patients - at the fairest prices possible.
Managing more than $67 billion in group purchasing volume, Premier translates the purchasing power of our healthcare alliance into significant cost savings and contract risk reduction. With one of the strongest contract portfolios in the industry, including third-party purchased services contacts, we help our members save on thousands of products and services.
With the support and commitment of our members, Premier is also changing the way we source vital products – leveraging data to identify supplies most at risk and partnering with U.S. companies and vetted global suppliers to scale up capacity.
In applying lessons learned from the pandemic, chief among them is the power of data and technology-enabling the supply chain for greater visibility and a leg up in cost savings opportunities. Providers across the nation are now leveraging Premier technology to analyze total supply spend, transform accounts payable processes and find savings opportunities all in one place.
So while U.S. inflation may endure for a period of time, a technology-enabled supply chain built to establish long-term resiliency is here to stay. We’ve got your back!