Supply chain is healing, but inflation relief is likely months away

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  • The United States is probably past the worst of the supply chain crisis, but full recovery is still a long way off.
  • “It’s just that things aren’t getting worse as fast as they used to be,” one economist told Insider.
  • With spending by Americans hitting record highs last month, inflation is expected to persist through 2022.

The United States is probably past its worst supply chain nightmare. But recent improvements have not been enough to calm inflation, and the latest data suggests prices will continue to soar for the rest of the year.

The country’s inflation problem is a two-pronged problem. Late 2021 shipping delays and port bottlenecks have left businesses with insufficient supplies. At the same time, Americans unleashed pent-up demand throughout the past year and pushed spending above the pre-pandemic trend. Too many dollars were chasing too few goods, and companies seeking to protect their profits were pressured to raise prices.

One of these areas is slowly improving. Various indicators of supply chain pressure, from container shipping rates to delivery times, have eased in recent months. Jefferies predicted in mid-October that the United States had “passed the peak,” and JPMorgan shared a similarly optimistic outlook last month, saying maritime pressures “are easing in the right places.”

But other factors suggest that these forecasts could be a little optimistic. The situation may be calming down, but that has not yet been enough to calm the rise in consumer prices. With stronger than expected demand, it looks increasingly likely that prices will rise for the rest of the year.

The most recent data confirms this and suggests that the highest inflation in four decades is not going away. The producer price index, which instead tracks business input costs, climbed 1% last month, doubling the median forecast and marking the biggest jump since May. Rising input costs tend to precede rising prices as companies are pressured to maintain margins.

Part of the problem is how widespread inflation has become, JPMorgan chief economist Bruce Kasman said Thursday. The bank expects price growth to “extend beyond the narrow set of items directly tied to supply bottlenecks, he said. Still, the “intensity of the acceleration” in price growth across the index was “surprising”, Kasman added. Inflation is no longer a temporary symptom of reopening; it turned into a much bigger problem.

The United States is past the peak of the supply chain crisis, but is still a long way from recovering

It doesn’t help that the supply chain crisis still hangs over the recovery. The situation is improving, but measures such as shipping times and prices are still much worse than they were before the pandemic, Alex Lin, senior U.S. economist at Bank of America, told Insider on Thursday. The United States may have passed the summit, but the path down the mountain so far has been slow and arduous.

“We haven’t really seen any real improvement. Things aren’t moving faster in the supply chain,” Lin said. “It’s just that things aren’t getting worse as quickly as they used to be.”

The other half of the inflation problem is also proving more tenacious than expected. Stronger-than-expected demand pushed retail sales up 3.8% last month, nearly doubling the average forecast of a 2% gain. That marked the biggest one-month jump since stimulus checks were last issued in March. Despite the bleakest economic climate in a decade and skyrocketing inflation, Americans are still spending big.

Granted, retail sales are measured in nominal dollars, which means higher prices played a part in the increase. The metric also largely tracks spending on goods, which has soared during the pandemic, while spending on services has been much weaker.

Still, with the supply chain still in a complicated tangle, demand is what will have to give for inflation to come down slightly, Lin said.

“Much of the normalization must come from falling demand and slowing spending on goods,” Lin added.

Inflation will probably be a story of 2021, 2022 and 2023

Help is on the way. the


Federal Reserve

is very likely to raise interest rates in March, kicking off its long process of removing economic support and fighting inflation. Interest rate hikes ripple throughout the economy, as they drive higher rates on everything from auto loans to credit card payments.

Thus, Fed action could relieve demand in the right places. Higher rates are likely to dampen demand for major purchases like cars and homes. Reduced demand for the latter would spill over to other items like furniture, appliances and commodities like wood and steel, Lin said. The effects won’t be immediate, but lowering demand is the first step to achieving healthier levels of inflation, he added.

Overall, Lin’s inflation forecast is similar to his outlook on the supply issue: it is improving but not as fast as hoped. Bank of America revised its year-end projection for core personal consumption spending — another popular inflation measure that suppresses food and energy prices — last week to 4.3% from 4 %. That’s still well above the Fed’s 2% target and the average price growth seen before the pandemic. The bank also expects inflation to remain “pretty high” through 2023, Lin said.

The situation is improving, but Americans are expected to feel the heat for many more months.

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