Central banks’ hopes of a supply chain miracle could be dashed by China and Ukraine

WASHINGTON, May 18 (Reuters) – Global central banks hoping that high inflation would ease thanks to improved global supply chains saw little relief until April as new lockdowns against coronaviruses in China and the war in Ukraine have lengthened delivery times and driven up costs, according to new analyzes from the New York Federal Reserve and others indicate.

A global supply chain stress index, released by the New York Fed on Wednesday, rose in April after four months in which supply problems appeared to ease, a reversal that, if continues, potentially means more persistent inflation even as central banks struggle to control rising prices. Read more

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The April index, combining a range of statistics on global transport costs, delivery times and other data, “suggests that the moderation we have seen in recent months has partially reversed, as measures lockdown in China and geopolitical developments are putting additional pressure on delivery times and transportation costs in China and the eurozone,” wrote a team of New York Fed economists.

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An Oxford Economics index of supply problems in the United States eased last month, but the improvement masked a decline in goods from China – a factor that has helped ease shortages in the country. trucking industry.

A Morning Consult poll found that a large number of US consumers reported that products were unavailable or harder to find in April, or that delivery times for products ordered online had slowed. About 60% of grocery shoppers said they were “having trouble finding certain items” and 40% said deliveries of home improvement products had slowed, the survey found.

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“Supply chain conditions remained very tight in April…Logistical challenges eased…but we take this reading with a grain of salt as the improvement was partly artificial as China’s lockdowns slowed down trade flows through U.S. ports and weighed on business activity,” wrote Oren Klachkin, chief U.S. economist at Oxford.


The Fed and other major central banks are already raising interest rates or planning to do so in an effort to rein in inflation well above the 2% target that has become the norm for monetary policy in the world’s major developed economies.

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The hope is to reduce demand for goods and services, as higher interest rates discourage home buying and other large purchases, and in doing so, to “bring together supply and demand …” Fed Chairman Jerome Powell said on Tuesday. Read more

Both have been out of whack throughout the pandemic, particularly in the United States where billions of dollars in federal spending and COVID-related transfer payments have left households, businesses and local governments with money to spare. use even as global supply chains sputter through waves of infections and lockdowns – and now a war in Europe.

But policymakers are also hoping, as Powell put it, to “give supply a chance to catch up and inflation a chance to come down” of its own accord as goods begin to flow more easily around the world. .

However, to what extent and how quickly this happens has become both more uncertain and increasingly important to the pace of rate hikes central banks may have to impose and the ultimate level of interest rates required. to contain inflation. The longer the global supply remains constrained, the stricter central banks will have to be in their efforts to curb demand, growth and potentially jobs.

There are immediate concerns based on acute problems, a shortage of truckers in Europe, for example, caused by Russia’s invasion of Ukraine.

“Shortages in Europe’s transport sector could worsen as many Ukrainian and Russian drivers are no longer available for work,” Isabel Schnabel, a member of the European Central Bank’s executive board, said last week.

In the longer term, the possibility of a more regionalized global economy, carved into smaller geopolitical zones, could mean a long and costly adjustment to a world of higher prices.

“There is a real possibility that globalization will reverse to some degree,” Powell said. Even if local industries would adapt over time, “it would be a very different world” to the one that produced around 30 years ago in which prices were slowly rising overall.

The situation has brought into focus whether China’s strict COVID containment policies will be eased and, if so, how quickly the country’s production of manufactured goods and industrial goods can recover.

China Beige Book, a country-focused data and analytics firm, said in a note last week that arrears were likely to worsen, potentially causing China’s economy to shrink in the second quarter of the year. and could cause US inflation to rise rather than peak in the coming weeks.

Noting that Chinese ports are “experienced near historic backlog levels,” the company wrote that “if supply chain backlogs from China cause a second wave of US price spikes in early summer, then the Fed will be completely stuck in terms of what it can do.”

The lockdowns in China “appear to be hampering the production and movement of goods and services, given their scale, and compounding the supply chain challenges we’ve encountered that have driven up prices,” it said Wednesday. US Treasury Secretary Janet Yellen at a press conference in Bonn, where she will meet senior finance officials from the major developed economies of the Group of Seven. Read more

“China’s economic performance really impacts growth around the world,” Yellen added.

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Reporting by Howard Schneider and Balazs Koranyi; Editing by Paul Simao

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