Wall Street Journal title: How Supply-Chain Snarls Made Everyone Wrong on Inflation
WSJ subtitle: Supply-chain problems might have been much more persistent than economists realized, new research suggests
By: Justin Lahart
Date: 4 January 2024
“On inflation forecasting, everybody has a bit of egg on their faces. New research suggests that a misunderstanding of what was happening with global supply chains might be part of why.
When U.S. inflation first began to heat up in 2021, it was written off by many economists as largely a temporary thing. The interaction of reopening economies with the supply-chain snarls the pandemic had set off caused a burst higher in prices that wouldn’t last. Or, as Federal Reserve policymakers put it when they left rates on hold near zero in November 2021, “Inflation is elevated, largely reflecting factors that are expected to be transitory.”
As 2022 got under way, the New York Fed’s Global Supply Chain Pressure Index, a widely followed measure based on freight costs and manufacturing surveys, showed the shipping snarls that had beset the economy were getting untangled. By September 2022, it was back to prepandemic levels. But inflation kept running hot: That same month, the Commerce Department measure that the Fed prefers showed that prices excluding food and energy were up 5.5% from a year earlier, just shy of the 39-year high it hit that February. By then some economists were advancing a new narrative—one in which inflation was getting driven by a tight labor market, and where the economy would need to endure a spate of high unemployment to bring prices under control.
Since then, however, inflation has cooled markedly even though unemployment stayed low. How could this happen? At least a partial explanation might be that those supply-chain problems really were transitory but were also in place longer than most economists realized.
Overseas container shipping accounts for a major portion of international trade. Containerships carry transceivers that broadcast positional information, including their headings and speed. Economists Xiwen Bai, Jesús Fernández-Villaverde, Yiliang Li and Francesco Zanetti used this data to determine how bad congestion problems at container ports worldwide were in any given month.
If, for instance, ships’ headings show that they are quickly arriving at berth, where they can load and unload cargo, a port probably isn’t experiencing congestion problems. If, on the other hand, ships spend time moored in an anchorage, the port is more likely to be dealing with congestion problems. They used this to create an average congestion rate measure, which shows globally the share of containerships that experienced delays loading or unloading after arriving at port.
The measure shows delays increasing in late 2020, and by the start of 2022 showed that 35% of ships were getting delayed versus an average of 26% in 2019. Unlike the New York Fed’s index, it shows congestion problems at global ports stayed elevated through July 2022 before falling. Because these congestion problems are representative of costs to businesses beyond the prices they paid to ship goods, they help explain why inflation was so persistent.
“What really kills you is when they tell you it will arrive on Monday but it arrives on Friday,” says Fernández-Villaverde.
Starting in August 2022, average congestion rates started falling, and shortly after that core inflation turned lower, too. According to the Commerce Department, core prices were up 3.2% from a year earlier in November. Compared with six months earlier, they were up just 1.9% at an annual rate.
Fernández-Villaverde thinks that the burst of inflation wouldn’t have been so bad if the Fed had started raising rates earlier. Under the model he and his co-authors propose, the supply-chain shock made prices unusually sensitive to changes in demand, so reining in demand can help a lot. This suggests that the central bank should be ready to respond if other supply-chain shocks emerge—something to bear in mind with missile attacks linked to the Israel-Hamas war targeting commercial ships passing through the Red Sea, and a historic drought slowing passage through the Panama Canal.
But the broader takeaway is this: If supply-chain problems lasted longer than economists recognized, neither inflation’s persistence through much of 2022, nor its cooling in 2023, is as surprising as it seemed.”
0 Comments