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January 13, 2023 | 13:04
Supply Chains Unsnarling, Goods Prices Falling
Economics
Economics
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Supply Chains Unsnarling, Goods Prices FallingU.S. consumer goods prices, excluding food and energy, dropped 0.3% in December, falling for a third consecutive month. Since September, core goods prices have decreased at a 4.8% annualized rate, the most ever over a three-month interval since data commenced 65 years ago. Core goods inflation is now just 2.1% y/y, down from record-high readings over 12% hit last February and for a few months in 1975 (Chart 1). |
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The steep descent reflects the steadily improving balance between strong demand for goods and constrained supply of products that caused the steep climb in the first place. In April 2021, core goods inflation jumped a record 2.7 ppts to 4.4% y/y, the latter being a 30-year high at the time (May and June also followed with monthly extremes resulting in a record-high three-month annualized gain of 26.3%). The jump was partly owing to base effects; a year earlier, there was a string of negative monthly moves during the onset of the pandemic and economic restrictions. But it was mostly due to the surge in spending as past and current policy stimulus came home to roost, and the final stages of domestic economic reopening unfolded. |
Global and domestic supply chains, still reeling from the pandemic, couldn’t keep up, worsening the demand-supply balance and snarling supply chains further with inflationary consequences. To help monitor the situation, the Federal Bank of New York introduced the Global Supply Chain Pressure Index (GSCPI) in January 2022 (Chart 2). Before the pandemic, the GSCPI signalled global supply chain pressures owing to natural disasters such as 2011’s tsunami in Japan and separate flooding in Thailand. It also signalled supply chain disruptions resulting from the Trump Administration’s tariffs and the U.S.-China trade war, beginning in 2017. The pandemic’s onset and related economic restrictions in 2020 caused the GSCPI, not surprisingly, to spike. Early efforts to relax restrictions saw pressures ease, but the virus’s subsequent resurgence resulted in restrictions being reinstituted and more absenteeism among production workers, both domestically and globally. Against this supply background, as 2021 unfolded and domestic spending strengthened, supply chain pressures escalated along with goods prices. Through the end of the year and start of 2022, the surging Omicron variant wreaked further havoc on supply chains, owing to absenteeism rather than restrictions domestically, and the combination of both globally. The GSCPI reached its pinnacle in December 2021. |
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The worst imbalance between strong domestic demand for goods and constrained supply of products, along with the peak in U.S. core goods inflation, occurred during the months surrounding the GSCPI’s pinnacle. A prime example is the array of consumer goods impacted by the global shortage of semiconductors. Inflation rates peaked at 13.3% in August 2021 for televisions (a record 71-year high); 8.5% in September 2021 for computers, peripherals and smart home assistant devices (a record 35-year high); 8.5% in January 2022 for appliances (also a record 35-year high); and, 13.2% in April for new vehicles (the highest in 73 years). High and rising prices, broadly, and the consequent erosion of purchasing power was poised to dampen demand. Then came the start of monetary policy tightening in March 2022, designed to restore economy-wide demand-supply balance along with price stability by weakening demand. By December, the Fed had 425 bps of rate hikes and about $350 billion of quantitative tightening in the hopper. Meanwhile, the supply of goods continued catching up. In turn, supply chains started unsnarling. Russia’s invasion of Ukraine at the end of February 2022 caused the GSCPI to turn up again. These countries are major producers and/or exporters of energy, metals and agricultural products. Between the ravages of war on Ukraine’s production and distribution capacity along with the impact of sanctions on Russia, supply concerns pushed some commodity prices to record highs. Concerns soon shifted to there being adequate demand amid the tightening efforts among the world’s major central banks and inflation’s erosion of purchasing power. Commodity prices subsequently backed off, many to below pre-invasion levels. The GSCPI resumed its downtrend, reaching a 22-month low in September before drifting higher by the end of the year. The latter reflected the disruption to supply chains, particularly among Asian nations, caused by China’s zero-COVID policy and related economic restrictions. These have since been relaxed, with increasing Chinese infections now posing their own challenge for global supply chains. |
The GSCPI is composed of 27 variables. Six measure cross-border goods transportation costs via both sea and air. They include the Baltic Dry Index (raw materials shipping) and the Harpex index (container costs), along with inbound and outbound airfreight costs between the U.S. and Asia and the U.S. and Europe. The pandemic caused waves of absenteeism among crews, port workers and truck drivers, which gummed up the global distribution of goods and, particularly, the containers they’re shipped in. Look back to last summer when container cost increases were approaching 500% y/y and there were record numbers of ships at berth or anchor at America’s two largest container ports in Los Angeles and Long Beach. Although transportation costs have since subsided, they remain above their pre-pandemic levels, partly pushed by elevated diesel fuel prices and wages. The remaining 21 metrics are all derived from indices in purchasing managers’ surveys. Included are supplier deliveries, backlog of orders, and inventories for U.S. manufacturers along with those in the Euro Area, China, Japan, South Korea, Taiwan, and the U.K. For American factories (Chart 3), supplier delivery delays hit a 47-year high in May 2021 as the backlog of orders (with a shorter history) hit a record or 29-year high. Through the final three months of last year, both metrics slipped below the 50 mark, meaning most manufacturers were facing falling backlogs and delivery delays. In the wake of 2021’s constrained supply of production inputs, there was a push to secure adequate inventories. This metric peaked later in July 2022, hitting a 38-year high. There was a slight majority of firms still looking to supplement inventories by December 2022. Prices paid (for production inputs) also slipped below the 50 level during the final three months of last year after hitting a 43-year high of 92.1 in June 2021. This performance partly reflects the slide in core intermediate and crude producer prices (Chart 4). Inflation for the former peaked above 24% in November 2021 (a 46-year high) and has since dropped under 4%. Core crude PPI inflation peaked at almost 46% in May 2021 (a 47-year high apart from April 2010’s print) before heading steadily south except for the brief blip after Russia invaded Ukraine. It moved into negative territory during 2022H2 and is currently -8%. However, despite these input price trends, the annual change in core finished consumer goods prices has spent the last 10 months running in a 7.5%-to-8.5% range. The stubbornness probably reflects still-sturdy price gains for inputs other than core goods (such as wages and energy) along with still-double-digit annual increases in trade, transportation and warehousing costs. |
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With core consumer goods inflation noticeably slowing at the retail level, this indicates that import prices were having more of an influence. The annual change in imported consumer goods prices (excluding automotive products) peaked at 3.2% in March 2022 which is among the quickest clips in 30 years (Chart 5). It has since slowed to 0.4%, as global supply chains unsnarled, and the trade-weighted U.S. dollar appreciated. The greenback hit record highs in October, up nearly 12% y/y. And despite depreciating more than 4% through December, it takes about six months for the dollar’s annual changes to influence the pricing of imported consumer goods. Bottom Line: Consumer core goods inflation has slowed sharply and appears poised to wade into negative waters. This reflects the lagged influence of U.S. dollar appreciation on import prices and recent stubborn inflation at the domestic producer level relenting as weakening consumer demand allows disinflation on the production input front to better filter through. And, it reflects the continued unsnarling of global and domestic supply chains as weakening demand also allows supply to better catch up. |