US Inflation and Frustration Still Rampant Amidst Chip Shortage

The US economy is still struggling with the continuing computer chip shortage, despite the recent exceptional economic growth. The chip issue has been plaguing the world for over two years due to the Covid-related lockdowns in Asian factories. It may, however, last for an unclear period of time, since the industry is still in flux.

On February 4, the House passed a bill that could potentially funnel $52 billion to semiconductor manufacturers in the form of subsidies and grants. This is a tob priority for the Biden administration, yet it still needs to be approved by the Senate. The EU is planning to adopt a similar plan that would pump approximately $48 into the same industry.

The shortages have been frustrating for the end-consumers, who are unable to purchase new vehicles, and have to purchase used ones for exorbitant prices. Auto manufacturing plants are being shut down because of the lack of microprocessors required for production. In 2021, approximately 8 million fewer cars were manufactured than the projected estimate, leading to a price hike and driving inflation. Other products affected by the shortage of microchips are smartphones, game consoles, a range of medical devices and other useful and convenient objects, producing a ripple effect on the global economy.

Is the pandemic at the root of the problem?

It is, among other things.

By the time chip factories began to reopen, there was an extensive backlog of orders. The unforeseen demand was driven by the pandemic - more people stayed home and required more electronics to work, rest and entertain themselves. The remote work and distant learning, for instance, led to a huge rise in demand for PCs and laptops.

What other factors added to the problem?

The need to balance out the manufacturing of older chips still needed for certain products, and the production of cutting-edge microchips for the more advanced devices.

Fires, energy shortages and winter storms exacerbated the problem.

The shift of production to Asia from the US has been going on for decades, and the recent developments has led the US to seek to restore local production to a certain extent. Taiwan is the center of global chip dependence.

The US produces 12% of the microchips in the world, down from 37% in 1990. The reason is quite clear – production costs are 30% higher in the US than in Asian countries. The EU has a 9% share in the global chip production industry, and is looking to boost that number to 20%.

Is the shortage really bad?

2021 has seen a 17% increase in chip demand compared to 2019, and the factories are currently unable to fill that demand, even at max capacity. Inventories are down to 5 days from the pre-pandemic 40, and shortages are slated to continue into the summer, experts predict.

Chip prices are up, and the products that require them are growing more expensive as well. Used car prices, for instance, went up 37% in 2021, driving up inflation and leading the Federal Reserve to raise interest rates.

Will it get any better?

Specifically in the US, there is hope. Even now, the chip supply situation is already looking better than a year ago. Used car prices are settling down a bit, having fallen by 1-4% for 2015-2021 autos.

Is there a way to avoid future shortages?

The chip industry is expanding in a great way. $150 billion will be invested in new chip factories, and a similar amount was spent in 2021. Meanwhile, prior to the current situation, $115 was the largest amount invested in the industry annually. The upcoming projects include Intel’s chip factories in Arizona and Ohio, and Samsung’s, Micron’s and GlobalFoundries’ plants in the US. All of this is done to reduce US reliance on chips produced abroad, although it will take many years before it happens.

The government funding in the amount of $52 billion should assist in expanding chip production and, more generally, increase the competitiveness of the US. Despite the bipartisan support for boosting domestic chip production, there are still important differences that need to be reconciled. Another part of the bill would provide $45 billion to reinforce supply chains for high-tech products, as well as other issues that have raised GOP concerns about the costs and scope of the legislation.