- Pandemic-induced bottlenecks in supply chains — a leading cause of the highest inflation in four decades — returned to normal last month on improvements in such factors as delivery times, prices paid and intermodal freight traffic, according to RSM.
- “The U.S. Supply Chain Index was back above neutral in July for the first time in nearly three years on the back of the continuing strong rebounds in inventories and capacity utilization,” RSM, a consultancy, said in a report. It predicted that supply chain improvements will continue.
- “With most of COVID-19 concerns behind us and the renormalization of supply-chain linkages around the world, we should expect substantial relief coming from the supply-induced components of inflation,” RSM said. It estimated that the combined elements of the supply chain account for about 35% of year-over-year inflation.
Federal Reserve Chair Jerome Powell and his policymaking colleagues maintained record stimulus last year even as inflation rose, insisting that “transitory” crimps in supply chains would eventually clear up and reduce price pressures.
Powell acknowledged in November that the central bank underestimated the persistence of supply chain constraints and, in March, the Fed began the most rapid withdrawal of accommodation since the 1980s.
The economy has recently cooled a bit. Inflation eased more than expected last month, with the consumer price index rising 8.5% compared with the same month last year after increasing 9.1% on an annual basis in June. Fed officials have repeatedly voiced a determination to reduce inflation to their 2% target.
“While our base case shows inflation will continue to retreat as supply-chain disruptions fade, we expect the annual inflation rate will likely stay around 3% by the end of 2023 and remain above the 2% target rate for a while,” RSM said.
The RSM index aligns with improvement this year in the New York Fed’s Global Supply Chain Pressure Index (GSCPI), which combines 27 metrics such as cross-border transportation costs.
The GSCPI surged at the start of the pandemic as China imposed lockdowns, briefly fell as world production recovered in mid-2020 and rebounded as the virus flared again.
“The moves in the GSCPI from the beginning of 2022 suggest that although global supply chain pressures have been decreasing, they remain at historically high levels,” the New York Fed said early this month.
The withdrawal of monetary stimulus does little to smooth the flow of goods across supply chains. Aggressive policy tightening curbs demand and has little if any direct impact on speeding the flow of goods across the economy.
“Domestic monetary policy actions would have only a limited effect on these sources of inflationary pressures,” New York Fed economists said in January, referring to how supply chain blockage increased consumer and producer prices.