BlackRock Investment Institute

Macro insights

Inflation pressures along the supply chain

Short-term disruptions in global supply chains are likely to bring a renewed focus on inflation – and on central banks’ tolerance of inflation overshoots.

Some Covid-driven supply chain disruptions are coming to the fore as pent-up demand starts to unleash amid an accelerated activity restart. The chart shows how sharply supplier delivery time has increased for manufacturing firms. The U.S. stands out for having even longer delivery time now than during the height of the pandemic.

Supply chain pressures

Chart showing longer delivery times since the start of the Covid-19 pandemic

Sources: BlackRock Investment Institute, Markit, with data from Refinitiv Datastream and Haver Analytics, March 2021. Notes: The chart shows an index of delivery time for items used in the production process, for manufacturing firms. As delivery time lengthens for example due to capacity constraints the level of the index falls. The y axis is inverted.

Covid-19 severely disrupted global supply chains when it hit early last year. The broad stop in production hit supplies of manufactured goods such as wood and steel, causing a standstill in industries that use such products as inputs. The constraints improved somewhat as economies began to reopen, but the disruptions have since returned as the economic restart – and the rebound in demand – has proved to be faster than many expected. Firms responded initially to the pandemic shock by using the standard recession playbook of cutting costs and capacity broadly. Now they are grappling to keep up with the sizeable pent-up demand built up during the lockdown.

Longer supplier delivery times has important implications for inflation in coming months. Disruptions are already translating into higher prices for producers. Higher expected prices also echo the Federal Reserve’s latest projections on core personal consumption expenditure (PCE) inflation published earlier this month. The Fed now expects core PCE inflation to be 2.4% in 2021 before easing back closer to its target next year – but top Fed officials have made clear they expect this rise to be transitory.

Availability of labor is a crucial component of being able to ramp up supply. The pandemic was unlike a business cycle in the jobs market because it led to a sharp and immediate plunge in employment, particularly for contact-intense services – which remain far short of normal employment levels. The big question: Will firms be able to rehire quickly as the vaccine-led, fiscally boosted restart in services gets underway? Early evidence is encouraging: job vacancies in key sectors have increased notably in recent weeks alongside employment gains in the latest U.S. jobs report – especially for hospitality.

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