Why Is Inflation So High If The Supply Chain Crisis Is Finally Subsiding?

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Fed supply chain pressure index moving against inflation as reported by American Shipper.

Transitory inflation

Remember back in 2021 when inflation was “transitory” and surging consumer prices were blamed on the supply chain crisis?

The Fed and macro investors became intensely interested in chaos at the ports.

The focus on bottlenecks spurred the Federal Reserve Bank of New York to create a new barometer called the Global Supply Chain Pressure Index (GSCPI) in January.

The implication was that if supply chain pressure reduced, inflation would ease.

The monthly measure has plunged 66% from its peak, from 4.31 standard deviations above average in December to 1.47 standard deviations above average in August.

Other supply chain indicators also fall

It’s not just the GSCPI that’s unmoored from inflation.

The OTI measures the average number of days cargo takes from the time it leaves a factory in Asia to the time it exits the terminal gates in the U.S. or Europe.

After peaking at 113 days in the week ending on Jan. 23, it fell 24% to 86 days on the week ending on Sept. 25.

The weekly Drewry World Container Index peaked at $10,377 per forty-foot equivalent units (excluding premiums) in the week ending on Sept. 23, 2021.

Yet another example: Container bookings have followed a similar downward slope as the GSCPI, OTI and Drewry World Container Index.

Why hasn’t supply chain easing helped inflation?

Unlike in late 2021, when retail execs on conference calls talked about import delays and marking up goods to pass along surging freight costs, they’re now talking about having too much inventory in warehouses and discounting goods to clear the excess.

If the supply chain crunch was such a major driver of inflation, why are so many indicators pointing to an easing of supply chain pressures at the same time inflation remains exceptionally high?

One theory is that the supply chain was at least something of a red herring.

Another is that supply chain pressures are indeed easing, but they’re still way above pre-COVID levels.

The Drewry World Container Index is currently three times higher than it was at this time of year in 2019.

According to Descartes, U.S. imports in August were flat versus July and up 18% versus August 2019, pre-COVID.

Signs of hope but supply chain crunch not over

Flexport addressed the status of the supply chain squeeze in a presentation on Thursday.

Flexport Chief Economist Phil Levy highlighted the role of the supply chain crunch in public policy. 

“To the extent one thought supply chain problems would get fixed, that was part of the rationale for calling [inflation] transitory.”

We waited to see that in 2022 and it didn’t happen.

And nondurables are not even that far off the peak.

So, we have not seen a big consumption drop-off.

 

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Source: American Shipper