Thoughts

February 09, 2024 | 12:50

Supply Chains: Still Friend Not Foe

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Central bankers breathed a sigh of relief this week after the New York Fed’s Global Supply Chain Pressure Index (GSCPI) showed that supply networks were still running smoothly in January. Recall, the index shot up to more than four standard deviations above normal levels in late 2021, marking the apex of the severe disruptions caused by the pandemic shutdowns. Snarled supply networks sent commodity prices through the roof and production costs skyward, one big reason inflation soared to four-decade highs in the U.S. and Canada in mid-2022 (the other was overly stimulative policies that juiced the demand side of the inflation equation). But, apart from a brief spike at the onset of the war in Ukraine, the index has made a beeline downwards. In fact, by May 2023 it had matched a record low, indicating that supply chains were operating much better than usual. The speedier flow of global parts, materials and products greased the rapid decline in inflation.

Still, as drilled home by captains Powell and Macklem recently, the war on inflation isn’t over. Their main concern is that inflation could stabilize above the target if policy is not kept restrictive long enough to subdue demand pressure. But another fear, one beyond their control, is that global supply chains could become snarled again, prolonging the battle. Indeed, the GSCPI has been grinding higher since last spring, briefly punching above normal levels in November. This reflected a spike in shipping costs stemming from militant attacks on cargo ships in the Red Sea. Since then, however, the index has retreated amid a 56% slide in shipping fees, as measured by the Baltic Dry Index. In addition, U.S. factory supplier delivery times and order backlogs, two other components in the GSCPI, showed further improvement. Despite a second real war, the supply-chain front is holding.

Bottom Line: The Fed and Bank of Canada still need more time and data on prices, wages and demand to determine whether inflation will sustainably return to the target before declaring mission accomplished; but, so far at least, they can rest assured that supply chains remain an ally.