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Supply chains and US inflation

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Supply chains and US inflation

For some time, consumers around the world have been affected by shortages of goods, from basic necessities to microchips. At the same time, concerns about inflation have grown. EFG chief economist Stefan Gerlach looks at the relationship in the US between supply chain disruptions and inflation.

Stefan Gerlach
Stefan Gerlach

The Covid pandemic has led to a surge in inflation, particularly in the US. There are many obvious causal factors including exceptionally expansionary fiscal and monetary policies leading to strong growth of demand, a shift in demand from services to goods, rising energy prices and a reduction in the supply of labour. However, much attention has focused on supply chain disruptions, which appear to have played a critical role although historically they have not played much part in discussions of inflation. 

The NY Fed’s Global Supply Chain Pressure Index 
Economists at the New York Fed have proposed a measure intended to capture the severity of such disruptions. The Global Supply Chain Pressure Index (GSCPI) uses data on a range of indicators to provide a composite view of the state of global supply chains. The first set of indicators focus on international transportation costs. The second set of indicators rely on country-level manufacturing Purchasing Manager Index (PMI) surveys.  

The GSCPI, which is available monthly since September 1997, is shown in Figure 1 below. The key point is obvious: while supply chain pressures have fluctuated in the past, they have surged since the start of the pandemic in early 2020. They rose sharply from February to April 2020 during the first wave of Covid but declined during the summer and reached a low well within the normal range of fluctuations in October. They then started to rise again, reaching a peak in October 2021 and remaining close to that level in November and December.
 

1. Global Suppy Chain Pressure Index

Chart1.jpg


These data suggest that supply side pressures have played a role in the surge in US inflation in 2021. To explore this hypothesis formally, statistical analysis is necessary. 

Inflation during the Covid pandemic 
But just how important have supply chain disruptions been for the variations in inflation during the Covid pandemic? To assess this question, the VAR model is used to decompose movements in monthly, annualised inflation in 2020-21 into the parts attributable to shocks to oil prices and the GSCPI. 
 

2. Decomposition of inflation

Chart2.jpg


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