Data published by the Federal Reserve Bank of New York on Wednesday showed a sharp deterioration in global supply chain conditions in April. The Fed's Global Supply Chain Pressures index climbed to 1.82 in April, up from 0.68 in March, according to the release.
The New York Fed did not provide an explanation alongside the index for the factors behind the jump. The April reading of 1.82 approaches the 1.86 level recorded in July 2022, and the month-to-month increase from March to April represented the largest single-month move since March 2020, when the COVID-19 pandemic disrupted global commerce.
Observers linked the recent escalation in the index to disruptions stemming from the conflict kicked off by President Donald Trump’s attack on Iran. That confrontation has, the data noted, effectively halted much trade passing through the Strait of Hormuz and has been associated with higher global energy prices. The release indicated there has been no resolution to the conflict that would restore normal trade flows.
New York Fed President John Williams commented earlier in the week that these supply chain pressures have become "notable" and that recent readings "echo the severe shortages and supply disruptions that the world economy experienced in 2021 as it emerged from the pandemic." Those 2021 disruptions, together with government responses to the health crisis, were a key factor behind the highest inflation rates seen in decades. Even with the pandemic largely behind the global economy, inflation has not returned to the Fed's 2% target, Williams noted.
The combination of renewed supply constraints and elevated energy costs has begun to register in inflation statistics. The article cited that inflation data are already showing rising price pressures, driven in part by an import tax surge attributed to President Trump and by higher energy costs related to the conflict.
Economists at Evercore ISI projected that underlying inflation measured by the personal consumption expenditures index could be just under 3% in the fourth quarter. In their analysis they estimated that about 50 basis points of that figure would stem from tariffs, oil and supply chain disruptions, with an additional roughly 20 basis points coming from what they described as AI cost spillovers.
The renewed inflationary pressures have complicated the Federal Reserve's policy path. Officials have retreated from expectations earlier in the year that an interest-rate cut would take place in 2024 and increasingly anticipate steady rates for the foreseeable future, with the possibility of a rate hike if high inflation persists.
In short, April's sharp uptick in the New York Fed's global supply chain index highlights a fresh wave of disruptions concentrated around the Middle East conflict and its effects on trade and energy markets. Those disruptions are reintroducing upward pressure on prices and are influencing expectations about monetary policy going forward.
Key points
- The New York Fed's Global Supply Chain Pressures index rose to 1.82 in April from 0.68 in March, the largest monthly change since March 2020.
- The April increase brings the index close to its July 2022 level of 1.86 and is linked to trade disruptions associated with the conflict kicked off by President Donald Trump’s attack on Iran and related higher energy prices.
- Rising supply-chain and energy pressures are complicating the Fed's policy outlook, with officials moving away from expectations of a rate cut and considering steady rates or possible hikes.
Risks and uncertainties
- Persisting trade disruptions through the Strait of Hormuz could sustain higher energy prices, affecting energy and transportation sectors.
- Ongoing supply constraints may continue to push up inflation, complicating monetary policy decisions for the Federal Reserve and impacting interest-rate sensitive sectors such as housing and financial markets.
- If tariffs, oil price increases, and supply-chain problems persist, they could keep core inflation above targets and delay a return to the Fed's 2% inflation goal.