The sting of ongoing inflation for manufacturers

In 2022, inflation surged to the highest level in decades. In fact, consumer prices were up 9.1 percent over the year that ended in June 2022¹, which amounted to the largest jump in 40 years. This steep increase has impacted consumers and manufacturers, alike.

With inflation beginning a gradual decent in recent months, experts remain divided on just how long above-normal numbers will linger. The Federal Reserve aims for inflation to settle at 2 percent², which some experts say may take years to achieve. Goldman Sachs projects that core CPE inflation will drop to near 3 percent by December 2023³. Morgan Stanley is even more optimistic, predicting it will dip to 2.4 percent⁴ during the same period. While either outcome would be welcome news, both are still above the Fed's target.

Although the experts diverge on how long it will take for inflation to reach the desired level, they do agree on one point: above-average inflation is not going anywhere anytime soon. Inflation is expected to remain higher than normal throughout 2023, which will affect manufacturers still contending with the impact of the pandemic and the related supply-chain slog.

Sourcing raw materials: not for the faint of heart

There are currently a wide range of pressures on the supply chain that are complicating a space that is still reeling from the significant disruptions caused by COVID-19-related challenges. According to research by SAP⁵, business leaders blame their current supply chain issues on geopolitical unrest, a shortage of raw materials, and increasing energy and fuel costs.

According to a study by research agency Achilles⁶, a number of important raw materials have been in short supply, which is driving up prices and slowing down manufacturing. These include common metals like tin and nickel, the battery-making powerhouse lithium, zinc and oil and gas.

Of course, chip shortages have been plaguing a wide range of industries since the onset of the pandemic. When the high demand of workers heading home with their laptops met low supplies spurred by COVID-related semi-conductor plant closures, scarcity ensued. This has put a strain on auto manufacturers and producers of popular consumer electronics, such as computers and cell phones⁷.

Businesses are getting creative with how they are managing the uncertainties of the supply chain. According to research by SAP⁸, they're taking a number of approaches to ensure they can get the materials they need regardless of what disruptions may rear their heads. This includes employing new technology to help them with supply chain challenges, developing more extensive contingency plans, prioritizing US-based suppliers and exploring environmentally conscious options.

"Businesses must be nimble and able to adapt to the uncertainties in the market," notes Ashley Moffatt, Senior Vice President of Brokerage Primary Casualty. "This takes proper planning, but it's non-negotiable for those that want to thrive in today's economic climate."

Still, there's hope for the lingering supply-chain crunch and the associated surge in costs. The Federal Reserve of New York's Global Supply Chain Pressure Index⁹ shows signs that global supply chain pressures are easing, leading to a more optimistic outlook for the year ahead.

The weight of global trade sanctions

Global trade sanctions have also been leaving their mark on businesses across the country. The US has long enjoyed a strong trade relationship with China. However, since 2018, the US has imposed a 25 percent duty on 34 percent of imports from "the world's factory"¹⁰. This has led to a significant decline in imports from China, which has long been a source of cheaper goods due in part to lower labor costs.

"As a result, the cost of many items that are important to both businesses and consumers in the US have gone up," explains Moffatt. "Companies need to decide whether they should purchase goods from China at higher prices or find other sources, either in the international market or here at home."

Global sanctions on Russia are also creating uncertainty in the oil and gas market, which is further complicating an already complex situation and has the potential to drive fuel prices even higher in 2023.

The impact to the products liability insurance market

Inflation and its related challenges are leaving some businesses exposed, which in turn affects the products liability insurance market.

"With the current global supply chain being so fluid, it's more important than ever to focus on quality control, testing procedures and other proactive measures to mitigate products liability risk," says Moffatt.

Brokers may also be impacted by the economic challenges affecting their insureds.

"With rising costs, the purchasing power of some insureds may be diminished, which will increase the competition in the products liability insurance space for more limited business," adds Moffatt. "Some insureds may negotiate or renegotiate their contracts to lower their insurance limit requirements, which may affect their excess placements."

At the same time, loss frequency and severity may increase due to moral hazards and lower investments in risk control or safety initiatives.

"The experts at Nationwide are here to help navigate these undoubtedly challenging times," affirms Moffatt. "Our financial strength, along with our flexible terms, conditions and pricing options, means we will be here for the long haul to support our partners, no matter what economic conditions the future brings."