The surge in inflation over the past 12 months is often attributed to supply chain disruptions arising from the Covid-19 pandemic. With workers staying home because of the risk of contracting Covid or because of the need to take care of children at home from school or sick relatives, firms have struggled to maintain employment and output. With spending shifting from services to goods, global transport capacity has been overwhelmed. The net effect has been strong demand colliding with a weakened supply capacity, leading to upward pressures on goods prices.
To gain a better understanding of this effect, the New York Fed published in January a study and data on supply chain disruptions (A New Barometer of Global Supply Chain Pressures by Gianluca Benigno, Julian di Giovanni, Jan J. J. Groen, and Adam I. Noble).1 On 03 March it published new data and an update by the same authors (Global Supply Chain Pressure Index: March 2022 Update).2
The new data for the global measure suggests that the supply chain disruptions have on balance become less severe in recent months. Thus, the global index fell from 4.50 in December 2021, to 3.82 in January and 3.31 in February.3 While this is an improvement, it remains the case that supply constraints are much greater than normal and that much more progress must be made before they have been fully resolved.
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The New York Fed’s index of supply chain disruptions: An update
The New York Fed published earlier this year an index of global supply chain disruptions. Last week it updated the index for January and February 2022. EFG Chief economist Stefan Gerlach provides a summary.
Chart 1. Global series
Source: NY Fed.
The new NY Fed study goes further than the earlier analysis in that it provides data for individual countries. This confirms that some countries have been worse affected than others. While the data point to supply chain tensions having declined since December 2021 in Japan, the UK and the US, they appear to have increased marginally in the eurozone. Furthermore, supply chain tensions are more severe in Japan and the US than in the eurozone or the UK.
Chart 2. Supply chain disruption
Source: NY Fed
Supply chain tensions have also abated in Korea and Taiwan but have become marginally tighter in China. Nevertheless, in all three economies they remain severe.
Chart 3. Supply chain disruption
Source: NY Fed
Looking forward, the war in Ukraine is likely to tighten some of these supply chain constraints. For instance, Reuters reported on 02 March that the German carmakers association VDA had said that the invasion was disrupting transport routes as well as financial transactions and that it was bracing for shortages in a range of raw materials.4 The significance of these disruptions will depend on the length and severity of the war and on the sanctions imposed on Russia by the western powers. The full impact will become apparent over time although is not expected to diminish meaningfully in the short run.
1 See http://go.pardot.com/e/931253/global-supply-chain-pressures-/ghn7/34222492?h=4KNYrRqDLLD43HY7X0nDXBRQLEiir-3bscqWo_VvXsQ
2 See http://go.pardot.com/e/931253/ssure-index-march-2022-update-/ghn9/34222492?h=4KNYrRqDLLD43HY7X0nDXBRQLEiir-3bscqWo_VvXsQ
3 The index is constructed to have zero mean and a standard deviation of unity. A normally distributed random variable, “a bell curve”, is more than two standard deviations away from its mean in 5% of the observations. The index being 3 standard deviations away from its mean is thus an exceptional event.
4 See http://go.pardot.com/e/931253/oduction-get-worse-2022-03-02-/ghnc/34222492?h=4KNYrRqDLLD43HY7X0nDXBRQLEiir-3bscqWo_VvXsQ