Did Supply Chains Drive Pandemic-Era Inflation?
Introduction
The question of whether supply chain breakdowns were a significant cause of pandemic-era inflation has gained considerable attention. If supply chain disruptions were indeed the cause, it would support arguments for capacity expansion, reshoring, or other remedial actions. Conversely, if supply chains were not the primary driver, policymakers would need to explore other factors, such as monetary or fiscal policies.
Key Findings
- Increased Deliveries: Within months of the pandemic's onset, the quantities of goods delivered significantly increased. This increase was observed in broad categories like overall imports of goods, flow through ocean ports, and personal consumption expenditures on both durable and nondurable goods.
- Demand Shock: The sharp increase in real personal consumption of durable goods, rising 32.1% from February 2020 to March 2021, suggests a large positive demand shock rather than supply chain issues.
- Inflation Measures:
- CPI vs. TM PCE: The Consumer Price Index (CPI) showed a rapid rise and drop, giving the impression that inflation was nearing its target. In contrast, the Trimmed Mean PCE (TM PCE) rose more gradually and remained elevated longer.
- Goods vs. Services: Inflation began with a surge in goods prices in early 2021, while service inflation remained relatively stable until September 2021. More recently, goods prices have shown signs of deflation, while service inflation has persisted.
Supply Chain Dynamics
- Containerized Goods: The paper focuses on trade in containerized goods, noting that international sourcing is frequently a policy concern.
- Shipping Delays: Average times for moving container cargo from Asia to North America increased from around 1.5 months pre-pandemic to nearly 4 months in early 2022.
- Shipping Prices: Shipping prices rose dramatically during this period.
Policy Implications
- Resilience Efforts: Significant efforts were made through legislation, regulation, and executive actions to enhance supply chain resilience, often interpreted as the ability to handle similar shocks with less disruption.
- Demand Management: The conclusion suggests that addressing inflation and shortages is better achieved through improved demand management rather than relying solely on supply chain improvements.
Definitions
- Inflation: Debates persist over the exact levels and nature of recent inflation, with different measures showing varying trends.
- Supply Chain: Broadly defined to include multiple stages of production, from domestic labor availability to international transportation.
- Demand: Refers primarily to the demand for goods being moved through containers, a distinct subset of economic activity.
Conclusion
Supply chain breakdowns were not the primary cause of recent inflation. Instead, the significant increase in demand and shipping costs suggest a large positive demand shock. Policymakers should focus on managing demand rather than solely improving supply chain resilience.