By Michael S. Derby
April 6 (Reuters) – Supply chain pressures heated up in March to levels last seen at the start of 2023, data released by the Federal Reserve Bank of New York said on Monday.
In its latest Global Supply Chain Pressure Index, the bank said that the measure rose to 0.68, a modest rise from the 0.54 seen in February. A reading of zero indicates normal levels of supply pressures, with a positive number denoting mounting pressure. March compares to the 1.09 reading last seen in January 2023, when supply chain pressures were abating.
The New York Fed did not provide any reason for the rise in the March reading, but it is almost certainly related to disruptions tied to the war in the Middle East that was started by the U.S.-Israeli attacks on Iran.
Even with the rise in March, the most recent reading is well off the peak 4.49 reading seen in December 2021, when COVID-19-related pressures were bearing down on the economy. With pandemic factors taken out, the March reading compared to levels seen in the run-up to the health crisis.
Supply chain pressures can be major drivers of inflation and were a key factor in the surge in price pressures that came out of the pandemic, which in turn required a substantial effort by the central bank to try to get inflation back to the 2% target.
The Fed was getting nearer to achieving its target until President Donald Trump returned to office just over a year ago.
Progress was interrupted as the president first hit the economy with wide-ranging import tax increases. Now, the war has led to big disruptions in energy supplies, which have already driven up costs around the world, while threatening even worse outcomes the longer the president pursues the war.
Speaking last week, New York Fed leader John Williams noted that pressures in supply chains have started to build.
“Uncertainty around the future path of inflation is high,” he said, and the Middle East war “could result in a large supply shock with pronounced effects that simultaneously raises inflation – through a surge in intermediate costs and commodity prices – and dampens economic activity.”
“This has begun to play out already,” Williams said. While data in hand as of last week did not show any “significant” supply chain issues overall, “we are now seeing supply chain disruptions related to the supply of energy and related goods,” he said.
The inflation prospects are complicating the Fed’s outlook and calling into question whether it will be able to deliver on the single rate cut it wrote down in forecasts at the March Federal Open Market Committee meeting. Supply chain disruptions are likely to be a major focus of Fed policy as policymakers seek to divine how sticky the latest round of rising inflation will prove to be.
“As disruptions accumulate, even a quick resolution will not lead to normalization of supply chain conditions in short order,” analysts at LHMeyer said in a note on Friday, as they pared back forecasts for Fed rate cuts this year.
(Reporting by Michael S. Derby; Editing by Chizu Nomiyama and Andrea Ricci )
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