The world's largest chipmaker, TSMC, has sent a shudder through global markets by warning of imminent price rises. For Britain, this is more than just another supply chain headache. It threatens the very foundations of the government's much-vaunted semiconductor strategy.
TSMC, the Taiwanese behemoth that fabricates chips for everyone from Apple to Nvidia, cited soaring production costs and relentless demand as the drivers behind the move. The cost of raw materials, energy and advanced equipment are all heading north. In the City, we call this input cost inflation. It is a nasty beast, and it is coming for your gadgets.
The impact on UK plc is twofold. First, the obvious cost push. Anything with a microchip from cars to washing machines gets pricier. Second, and more worrying, is the blow to Britain's ambitions to carve out a slice of the semiconductor pie. The government's National Semiconductor Strategy, launched with great fanfare, aims to bolster domestic design and packaging. But it relies on a stable and affordable supply of chips from abroad. If the base input costs are rising, how can British firms compete?
Investors are already voting with their feet. Gilt yields have ticked up as the market prices in higher inflation. The pound is taking a drubbing against the dollar. This is capital flight, plain and simple. Money is fleeing to safer havens, and British tech stocks are feeling the pinch.
Central banks, including the Bank of England, are now in a bind. Do they raise rates to tame this cost-push inflation, risking a recession? Or do they look through it, hoping the chip price rises are temporary? The latter is a dangerous game. Once inflation gets ingrained, it is devilishly hard to root out.
The government's strategy, while laudable in its aims, looks increasingly fragile in the face of these market realities. Spending taxpayer money to subsidise chip design is all well and good, but if the global price of fab capacity keeps rising, the return on that investment shrinks. Fiscal responsibility demands a hard look at whether this is money well spent.
Meanwhile, the consumer is caught in the crossfire. Next year's iPhone, PlayStation or Ford will cost more. That is not a prediction. It is a simple consequence of supply and demand. The chip market is tight, and TSMC holds the whip hand.
So, what does this mean for the man on the Clapham omnibus? It means his cost of living problem is not going away. And for the Chancellor, it means his growth forecasts need a serious reality check. The bottom line is this: until the semiconductor supply chain stabilises, expect volatility, rising prices and a government scrambling to keep its tech dreams alive.
