MNI: Inflationary Supply Chain Snags Easing-ECB Economists

Economists at the European Central Bank have found evidence of an easing of the supply chain pressures which have fed surging inflation, with the most marked improvement in sectors hardest hit by the Ukraine war, they told MNI.

Data through June for the ECB’s new global sectoral supply chain pressures (GSSP) index show significant easing in chemicals and natural resources, which saw supply deteriorate markedly at the beginning of the war, as well as an improvement in manufactured goods, a sector closely linked to China.

The data suggests pipeline inflation due to supply chain disruption should soften. The lag to producer prices may typically be two-to-three months.

The ECB researchers followed the New York Fed in developing a supply chain pressures index in response, initially, to the turmoil caused by the Russian invasion of Ukraine. The challenge for economists has been to quantify the impact of the disruptions, with the ECB working to identify the varying sectoral hits. (MNI INSIGHT: BOE Forecasters Challenged By Supply Chain Snags)

“Everyone in the industry was faced with the same issues. Everyone tried to find a way to summarise it in a single indicator. Of course, when you have a decomposition it is even nicer (because) … you can say it is going down because of this and other sectors are improving,” ECB economist Maria Grazia Attinasi told MNI.

UKRAINE EFFECTS EASE

The GSSP found supply chain pressures intensified in March and April, following the outbreak of the war in Ukraine, but have since eased.

“The improvement in recent months, from May up to now, is closely related to Russia and Ukraine but also to China. We can see an improvement in those sectors which were more affected by the war and by lockdowns in China,” according to Attinasi’s colleague Luca Metelli.

Russia accounted for 15% of the world’s exports of oil, gas and coal and is a key player in raw materials used in the production of fertilisers and in the chemicals industry.

The easing in sectoral supply constraints captured by the index do not, in themselves, entail that delivery of supplies from Russia and Ukraine have significantly improved.

The GSSP is derived from components of the global purchasing managers index, and does not capture the detail of trade flows across borders.

Rather than the supply of Russian raw materials improving, the data could reflect suppliers from elsewhere stepping in to fill the gaps left by the war, with firms diversifying their supply chains. But from the perspective of policymakers worried about the inflationary impacts of supply chain disruptions, what matters for now is that the global bottlenecks have become less restrictive.

The findings of the GSSP have correlated closely with those of the NY Fed and the picture they present is one of improvement, although the economists involved in both projects stress that they are not predictive tools.