Why inflation could get worse

The price of one of the most seemingly boring products in the world, bare printed circuit boards, is skyrocketing to levels never seen before.

Why it matters: AI-driven demand for chips and the war with Iran are two big factors behind the surge.

• And if you want to understand what's happening with inflation now and what could happen soon, bare printed circuit boards are key.

Zoom in: These circuit boards are the "foundational infrastructure of modern electronics," as the director of the printed circuit board lobby group put it last year.

• They're in everything from smartphones and cars to medical and military equipment and dishwashers.
• In non-industry parlance, these are the green rectangular thingies that they put the silicon chips on.

Where it stands: You already know that prices for computer chips are up a lot because data centers, and AI labs need tons of the highest-level memory chips to run their tech.

• And that demand is driving up prices not only for chips — chipflation! — but also for the boards that they get placed upon, as well.
• Printed circuit boards became a big flashpoint for supply chain concerns coming out of the pandemic — 90% of them are made in Asia. Lawmakers from both parties even repeatedly introduced a bill to re-shore production, most recently in May.

By the numbers: The producer price index for the boards rose 45% in July from the same time last year.

• These are the prices domestic producers of circuit boards charge. The U.S. produces only about 4% of the world's supply. But the number is still illustrative of the pricing squeeze being felt globally.

The intrigue: The proposed legislation wouldn't be of much help now because the war has pushed up prices for board inputs, or what's used to make them, primarily resin and copper.

• A major manufacturer of resin in Saudi Arabia was knocked offline in April after an Iranian attack, and it's unclear if it is operational yet. This one plant makes 70% of the world's high-purity polyphenylene ether resin, per CNBC.
• Prices for electronics are already moving higher (see the chart below), but experts warn we've only begun to feel these shocks.
• The price gains have helped drive up the shares of the biggest memory chipmakers by triple-digit percentages.

Flashback: The situation is similar to what we were seeing when pandemic-driven issues were raising costs for manufacturers and other businesses in 2020, but inflation only started hitting in 2021.

• "It takes at least six months, if not a year, for these price increases fairly far upstream in the supply chain to start to make their way to end users," says Jason Miller, a professor of supply chain management at Michigan State University's business school.
• A lot of suppliers have already locked in pricing through contracts.

"This is why 2022 was a bloodbath from a pricing standpoint," Miller says. "Because you had all these price increases in 2021. A lot of them didn't really start getting passed on till '22, and then you had the commodity shock in '22, and a lot of that wasn't really felt until '23, even."

Yes, but: A major difference this time is the labor market. A few years ago, a hiring boom was driving up wages. Labor costs were a big factor in sustaining inflation.

• These days, the labor market is languishing — and that might keep a lid on price increases.

Friction point: What's truly mind-blowing is that up until this year, the price of chips and computer stuff has nearly always been a deflationary input.

• "We've never seen increases like this," Miller says.

Bonus chart: Flash surge

You're already seeing chipflation feed into the CPI.

The price of computer software and accessories rose 21.2% in July from the previous year, the largest increase on record, according to the data released last week.

• Besides software, the category includes memory flash drives — which have seen their prices double over the past year.

Reality check: Overall, however, inflation looked pretty benign. As Matt wrote earlier this summer, "few Americans are going to cite the cost of flash drives for breaking their budget."