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What Chips Are Telling Us about Inflation 🍟

Remember that global chip shortage? It started in 2020 and went on for two whole years impacting anyone on the planet who used chips. Turns out, now there is a global surplus of chips.

This turnaround into a glut has caused memory chip prices to drop by 20%. The situation has got so bad that Samsung, the world’s largest memory chip maker expects its worst quarterly profit since the Global Financial Crisis.

Why was there a shortage?

The demand for chips has been growing enormously. As devices get smarter, more chips are consumed.

After the lockdown, the demand for personal-use gadgets grew multifold, adding to the already high demand for chips.

But while lockdowns increased demand, they also crunched supply as factories didn’t operate at full capacity throughout Asia, resulting in a massive global shortage.

What’s happening now?

After the shortage, all chip makers (and more) added capacities to deal with the deficit. After all, all electronic makers and the auto industry were suffering huge production delays, and inefficiency was mounting.

However, with high inflation and rising rates in the US and in Europe, economies are finally slowing down. Best Buy’s profits fell, Microsoft is seeing soft PC sales, and even Apple has been seeing falling Mac sales.

So, excess-supply-and-lower-demand later chip makers Samsung, Micron and Western Digital are all cutting production. They are all apparently losing money at a unit level. Samsung’s chip division posted losses of more than US$ 1.5 billion last week.

Why should I care?

The fate of major commodities can end up similar to the chip story, which pretty much sums up the course of events over the last two years. A major shortage followed by a slowing global economy, and then falling prices.

If that’s what happens to major commodities over the next few weeks/months, inflation may not remain as sticky and high after all, which might just prompt the RBI to continue going easier on rates.

And while the world slows down, the Indian markets might just find a legit reason to cheer!

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