Supply chain inflation is a very different beast. Inflation cause by supply chain disruptions is fundamentally different than the demand induced inflation typically managed with macroeconomic fiscal or monetary policy.
With excess demand, you would just have to withdraw the policy accommodation and eventually inflations pressures are very likely to subside. With supply chain disruptions, the capability of the economic system to provide goods and services is impaired. The disruptions may appear transient.
Just remember that repairing the supply chain is expensive, time consuming and may involve many years of elevated prices. Building more shipping containers, expanding the capacity of ports – It all takes millions of dollars and considerable time. Supply disruptions are not felt equally across all sectors of the economy, and one problem can create others.
A computer chip shortage results in lower production of automobiles. That nature of the supply problem is that broad-based demand management policies designed to lift or lower all boats are unlikely to be of much assistance in tamping down supply chain induced inflation.
On Friday (Oct 1), the United States Federal Reserve’s preferred gauge of inflation climbed at the quickest pace in 30 years. The timing of this numbers came at a pivotal moment.
Used car prices and costs for raw materials like cotton and crude oil are increasing as companies continue to suffer from persistent supply chain disruptions.
In South Korea, major fast food chains like McDonald’s and Lotteria are experiencing an unprecedented shortage of French fries. This happened because of delay in French fry imports from the United States amid the strained ocean logistics system.
Meanwhile, some say, the so-called ‘greenflation’ is holding back economic recovery as power bills are surging due to less coal production amid the transition to clean energy. Prices of natural gas or coal are soaring due to the imbalance of supply and demand. If this lasts, it could negatively impact the global economic recovery. Concerns are rising that a supply chain bottleneck and energy crisis could further add to inflation pressure around the world which will stay for years to come.