MNI INTERVIEW: Supply Chain Stress Hints At More Inflation

A fresh jump in a new index measuring strain in global supply chains would if it persists signal a risk of fresh inflationary impetus about to hit the world economy in coming months, two of the Federal Reserve Bank of New York economists who designed the trail-blazing data series told MNI.

The Global Supply Chain Pressure Index, which attempts to quantify supply chain snags which have significantly disrupted the global economy since the start of the Covid pandemic, hit 3.29 in April, up from 2.80 in March, probably due to the Ukraine war, and Covid lockdowns in major Chinese cities. April’s reading was below a peak of 4.38 in November 2021.

“The place where any shock to the index will show up is producer prices, eventually. There is a weaker relationship with retail prices. If there is a big move you would see it in firms’ prices in the course of a year,” New York Fed research advisor Jan Groen said. “If you look at the index over the past two years there is a persistence going on. A one monthly increment is not necessarily a huge thing.”

OLDER MODELS

New York Fed’s Monetary Policy Research Division head of international studies Gianluca Benigno led work to develop the index as it became clear that difficult-to-quantify trade and supply tensions, which became prominent during U.S.-China disputes and Brexit before intensifying during the pandemic, were having a large effect on inflationary outcomes not previously captured in a single measure. (See MNI INSIGHT: BOE Forecasters Challenged By Supply Chain Snags)

“For a long time we lived in a world that was interconnected … this interconnection was something that was perceived as normal,” said Benigno, adding that recent events may “signal that people should look at this dimension more carefully and monitor it.”

When supply chains come under strain, the index “gives a direction to the discussion and people can start going into the weeds of the underlying data to see … where this increase in supply chain pressures is coming from,” Groen said. “It brings a bit of discipline to the discussion. The index is a bird’s eye view of what is going on globally.”

Other central banks including the Bank of England have also been attempting to quantify supply chain disruptions. Trade economist Swati Dhingra, an academic colleague of Benigno’s who has worked on the topic, is set to join the Bank of England’s Monetary Policy Committee in August.

Groen said that the NY Fed index is “a public good. We put a relatively sophisticated measure out there and it is free for everyone to use. This is going to be topical for a long time to come with all the geo-political tensions and zero Covid. This is not going to go away.”