Supply Chain Bottlenecks and Inflation: The Role of Semiconductors

Abstract

year and a half after the COVID-19 recession, one of the sharpest economic contractions in history, the U.S. economy has rebounded rapidly and now seems to be overheated. Inflation is at its highest level in 30 years, and supply chains are strained: Shipping costs and delivery lags are increasing substantially, inventories are running down, and firms are finding it difficult to get key production inputs. However, there is no consensus on the extent to which disrupted supply chains account for recent increases in inflation relative to other channels. In particular, the bold fiscal response to the pandemic, along with the increased wealth due to the stock market and housing boom, have boosted demand for goods and services. Along with unprece dented labor market shortages, these forces can increase inflation even with well-oiled supply chains. Supply chain issues can exacerbate price increases: Even industries without large changes in demand might be forced to reduce supply and increase prices in response to shortages of key inputs. This essay discusses the extent to which supply chain disruptions account for the recent rise in inflation. We focus on the case of semiconductors, for which demand increased along with the pandemic-driven demand for electronics. The following features of the semiconductor industry make it an important case for investigating the role of supply chains in inflation: (i) Semiconductors, including microchips, are used in a wide range of goods, from computers to toys and automobiles, among many others.1 According to our calculations, approximately 25 percent of 226 manufacturing sectors use semiconductors as a direct input, and these industries account for 39 percent of total manufacturing output.2 (ii) Semiconductors are a key component for production in many sectors. Even though semiconductors typically account for only a small fraction of total input costs, scarcity of semiconductors can halt production of any good needing them because semiconductors have no close substitutes and production capacity is extremely Supply Chain Bottlenecks and Inflation: The Role of Semiconductors