SCDigest editorial staff

There is a curious thing going on: the global economy has recovered and is enjoying strong growth, yet overall inflation is relatively tame, even as oil and gas prices rose rapidly in 2005.

The global supply chain has a lot to do with it.

This really comes from two related factors:

• The increase in global trade and competition generally, which has limited greatly the pricing power of companies in the face of this fierce global competition.
• Increase use of global/low cost country sourcing, which has in many case enabled companies to maintain and lower prices while maintaining profit margins.

So, while global trade has its share of critics worried about offshoring and loss of domestic jobs, it has undoubtedly also played a key role in keeping the economy humming with mild inflation, which eliminates the need for more dramatic Fed action to tame inflation that ultimately really slows down the economy.

A December report from the Federal Reserve notes “that robust competition – including from foreign producers – was helping to contain cost and price pressures,” which in part has led the Fed to signal it is about through with interest rate hikes.

The Wall Street Journal recently noted the Alan Greenspan, outgoing chairman of the Federal Reserve, has identified globalization as the “missing variable” that accounts for the low inflation in the face of rising demand and diminishing productivity gains. The Fed says the impact is likely between a half and a full percentage point in the reduction of the inflation rate – a huge impact in economic terms.

The downside – manufacturing wages are feeling the effect, rising at a rate of 2.3% in 2005, down from 2.6% in 2004, as manufacturers most feel the impact of global competition. Service industry wages, meanwhile, rose 3.2% in 2005 from 2.7% in 2004. Auto parts giant Delphi, for example, is asking workers to accept substantial wage reductions to more reflect global market realities (read offshore opportunities) as part of its tactics after filing for bankruptcy late last year.

Will this ultimately lead to a backlash politically? Hard to say yet, but it’s clear the global supply chain is good for cost control but also tough on a company’s ability to raise prices. SCDigest is glad the Fed is recognizing what supply chain professionals have known for quite awhile.

Is there any doubt globalization is keeping a lid on costs and prices? Do you expect an effective backlash at some point as jobs and wages are impacted?

Let us know your thoughts.