Widespread Commodity Shortages Raise Inflation Fears

WASHINGTON — In a normal year, Ron Whelan, vice president of Roger B. Kennedy Construction, receives one or two “Dear Valued Customer” letters from suppliers notifying him of price increases for certain materials. This year, a stack of 30 such warnings sits on his desk in Orlando, Fla., alerting him that things as diverse as lumber, drywall, aluminum and steel are going to cost 10 to 20 percent more.

The notices are the result of commodity shortages that are rippling across the United States economy as growing demand for housing, cars, electronics and other goods runs up against supply chain congestion and high tariffs left behind by former President Donald J. Trump.

The shortages — and the price increases they are eliciting — are being watched closely by the Biden administration, which is under increasing pressure from industry groups and businesses to take steps to ease them. Automakers want the White House to help them get the semiconductors they need to make cars, while the housing industry is asking for tariff relief.

Pressure to intervene could intensify as the administration pushes for a multitrillion-dollar infrastructure investment package that includes money for building roads, bridges and electric vehicle charging stations — all of which could become increasingly expensive if prices keep rising.

“We keep waiting for things to settle down and get back to normal, but they haven’t,” Mr. Whelan said. He has considered using other material, such as metal stud systems rather than wood framing, for some construction projects because the price of lumber has almost tripled in the last year.

Economists and policymakers are carefully tracking the shortages as they hunt for signs of inflation, and companies are increasingly worried that the price spikes may not be temporary.

The Federal Reserve’s latest Beige Book survey found that businesses were citing “Covid-related disruptions in production and supply chain logistics” as reasons for shortages and price spikes of commodities such as “agricultural products, building materials, cleaning products and microchips.”

For now, the Fed is not overly concerned about the price increases, viewing them as temporary and not the type of inflation that could spiral out of control. The Fed chair, Jerome H. Powell, said last week that officials expected to see short-lived price spikes as the economy reopened and consumers started spending again.

Still, he acknowledged that the shortages could weigh on certain sectors, like the housing market, where inventories are “tremendously low” and builders are “struggling to keep up with demand.”

“If you’re an entry-level housing buyer, it’s a problem because it’s just going to be that much harder to get that first house,” Mr. Powell said.

And the Institute for Supply Management’s March survey of manufacturers said labor shortages and elusive parts were stunting the factory sector.

“Extended lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are affecting all segments of the manufacturing economy,” said Timothy R. Fiore, chairman of the institute’s Manufacturing Business Survey Committee.

In corporate earnings calls last month, some of America’s largest companies warned that higher commodity prices would soon be passed on to consumers.

“The commodity cost challenges we faced this year will obviously be larger next fiscal year,” said Andre Schulten, chief financial officer of Procter & Gamble, noting that its baby care, feminine care and adult incontinence products are scheduled for price increases in September. “We will offset a portion of this impact with price increases.”

Darius Adamczyk, chief executive of Honeywell, said the company was seeing substantial increases in the prices of steel, semiconductors and copper.

“That’s definitely a watch-out item for the year and for us, inflation is taking hold,” Mr. Adamczyk said. “I don’t think things are going to abate. The short cycle is definitely hot.”

A White House official who asked to remain anonymous to share the administration’s internal thinking said that price stability was primarily the Fed’s responsibility but that the administration was taking the risk of inflation seriously. While the administration anticipates temporary increases in prices as the economy reopens, the official said, it does not believe they will lead to a broader overheating of the economy.

Paul Ashworth, an economist at Capital Economics, said the shortages were largely a result of factories being unable to keep up with pent-up demand that was being unleashed as consumers emerged from the pandemic ready to spend.

And many factories are still not operating at a full clip. A shortage of truckers and clogged ports are also gumming up the gears that keep supply chains moving.

“This is better described as suppliers working at, or near, capacity and still unable to keep up,” Mr. Ashworth said. “Expanding capacity will take a lot longer.”

The shortages are more than just a nuisance — they are affecting crucial areas of the U.S. economy and could hurt growth. A global microchip shortage has caused disruptions across industries, but it has been particularly disruptive for the auto industry, with General Motors, Ford Motor and others temporarily halting production at factories, in some cases for weeks at a time.

In the United States, automakers could end up making as many as 1.3 million fewer vehicles this year as a result of the shortage, according to the Alliance for Automotive Innovation, a trade group. Ford said last week that its production in the second quarter would be about 50 percent lower than planned and that the shortage would reduce the company’s profit about $2.5 billion in 2021.

Carmakers want the Biden administration to urge that semiconductor suppliers give priority to the automotive industry so they can get the chips they need for vehicle production, said Matt Blunt, the president of the American Automotive Policy Council, which represents G.M., Ford and Stellantis, the company formed by the merger of Fiat Chrysler and PSA of France.

“If you look at our economic impact, when you cannot build a car in the United States because you’re lacking a handful of semiconductors, that has an entirely different economic impact than if you can’t build a consumer electronics product in Asia because you’re lacking semiconductors,” Mr. Blunt said. “So we think it’s appropriate for everybody involved, including the U.S. government and the administration, to encourage suppliers to prioritize a critical industry that has a critical impact on U.S. employment and our nation’s economy.”

After taking office, President Biden ordered a 100-day review of the semiconductor supply chain, and he proposed spending $50 billion on semiconductor research and manufacturing as part of his infrastructure plan. Last month, the White House hosted a virtual summit meeting on semiconductors with a group of business executives.

But the complex global supply chains involved in chip manufacturing do not lend themselves to quick or easy solutions to the current supply problems, leaving Mr. Biden with little apparent power to mitigate the shortage in the near term.

Manufacturing chips can take as long as 26 weeks from when a customer orders them, according to the Semiconductor Industry Association, which represents chip companies. And expanding U.S. chip manufacturing, as Mr. Biden wants to do, is more of a long-term aspiration, given the time and expense required to build new plants.

Any intervention by the Biden administration intended to help automakers could wind up hurting other industries that rely on chips, such as tech companies and appliance makers, which have made their opposition known to the administration.

In comments submitted to the Commerce Department last month, CTIA, a trade group representing the wireless industry, wrote that the federal government “should refrain from allocating semiconductor resources to specific industries versus others.” It warned that such a move would “cause unintended consequences that would be detrimental to a range of the United States’ most critical industries.”

The Information Technology Industry Council, which represents tech companies, urged against “picking winners or losers by prioritizing certain industries over others.” The Association of Home Appliance Manufacturers said semiconductor chips “should not be reallocated from the home appliance industry to another product or use.”

Intensifying the supply chain problems are hefty tariffs that Mr. Trump imposed on Chinese imports, along with steel and aluminum from Europe and other parts of the world. The Biden administration has said it is reviewing the tariffs, but it has so far been reluctant to make a sharp change of course on trade.

“That’s the one where it’s a third rail in terms of politics, domestically,” Chad Bown, a senior fellow at the Peterson Institute for International Economics, said of removing the China tariffs. “It would probably be interpreted as being weak on China somehow.”

Last month, a bipartisan group of senators led by Rob Portman, Republican of Ohio, and Thomas R. Carper, Democrat of Delaware, sent a letter to Katherine Tai, the United States trade representative, urging her to restart the process for American businesses to apply for exemptions from tariffs on Chinese imports so they can more easily buy products that are difficult to get from other countries.

Other industries are also urging the Biden administration to offer relief from tariffs.

The Associated General Contractors of America wrote to Mr. Biden in February, urging him to reach a new softwood lumber agreement with Canada to help alleviate a lumber shortage in the United States. The group noted that the rising prices mean higher building costs for projects at schools, hospitals, restaurants and offices.

Ken Simonson, chief economist for the contractors association, said he was disappointed that his group had received no response from the White House.

“I think that it’s undermining some of his goals to support more jobs in this country and also what he proposes to do on infrastructure,” Mr. Simonson said. “It is going to drive up costs and completion times for projects if we don’t have more availability of materials for affordable prices.”