Why supply chains are key to solving the puzzle of inflation
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Illustration: Allie Carl/Axios
A pandemic-era question is still stumping economists: How much more can the supply side of the economy improve?
Why it matters: The answer has huge implications for America's lingering inflation problem. If there are further improvements in store for supply chains, that would offer a notable disinflationary tailwind — and less pain for the U.S. economy.
Driving the news: The White House on Monday morning announced around 30 measures aimed at improving America's supply chains and trying to head off shortages of key goods. It's an effort partly done in the hope that more disinflation can come from buoying supply.
- Among the actions: invoking the Defense Production Act to promote domestic manufacturing of critical medicines, and new investments to strengthen food supply chains.
What they're saying: "We're pleased with the progress on supply chains that was showing up in lower prices," Lael Brainard, a top Biden economic adviser, told reporters Sunday.
- "But we're determined to keep working to bring down prices for American consumers and ensure the resilience of our supply chains for the future."
Between the lines: By one measure, the supply chain bottlenecks that skyrocketed during the pandemic have receded — and then some. The New York Fed's Global Supply Chain Pressure Index saw a record-low reading last month, a sign that the worst of the supply jams is behind us.
- A White House official said there is likely more disinflation to come from the supply channel, citing more capacity for companies to bring prices back down as their own input costs fall.
Of note: Whether or not these new efforts assist in the near-term inflation fight, they do mark the latest attempt by governments to strengthen supply chains as a preventative measure.
- If, as economists warn, the globe is entering a more volatile era and shocks to supply will be more frequent, the initiatives might make the economic consequences less jarring.
Yes, but: Leadership at the Federal Reserve is not sold on the idea that this progress will create an ongoing boost to the nation's economic potential.
- "While the broader supply recovery continues, it is not clear how much more will be achieved by additional supply-side improvements," chair Jerome Powell said earlier this month.
- "Going forward, it may be that a greater share of the progress in reducing inflation will have to come from tight monetary policy restraining the growth of aggregate demand," he said.
Between the lines: The Biden administration is betting that supply-driven improvements, helped by its administrative actions, will do some of the disinflationary work, and that the Fed therefore won't need to do more to crush demand.
The bottom line: Which narrative turns out to be right — and whether more supply-side improvements are on the way — will determine what the economy looks like in 2024 and beyond.
