Global Supply Chain Disruptions and Inflation During the COVID-19 Pandemic

Abstract

The COVID-19-pandemic recession and recovery have been unique compared with previous recessions, largely due to policies that led to behavioral changes. Lockdowns meant people were traveling less both for work and for leisure, eating out less, and going to fewer entertainment venues, among other things. At the same time, work from home and fiscal stimulus packages increased the demand for certain goods such as technological goods, cars, and furniture. These changes resulted in an overall shift away from consumption of services and toward consumption of durable goods.The rapid increase in the demand for durable goods, together with the global nature of the pandemic, has exposed vulnerabilities in the current production structure of these goods. Over the past several decades, production of durable goods has become more fragmented, relying heavily on global value chain (GVCs). 1 Instead of doing everything in-house, firms can outsource parts of their production processes to other countries. Figure 1 shows that GVC participation has been rising steadily over time, though it has plateaued in recent years (see Antrás, 2020).While GVC participation has advantages, as firms can benefit from outsourcing production to regions with a comparative advantage, it comes with risks (Santacreu and LaBelle, 2021a,b). ShocksWe investigate the role supply chain disruptions during the COVID-19 pandemic played in U.S. producer price index (PPI) inflation. We exploit pre-pandemic cross-industry variation in sourcing patterns across countries and interact it with measures of international supply chain bottlenecks during the pandemic. We show that exposure to global supply chain disruptions played a significant role in U.S. cross-industry PPI inflation between January and November 2021. If bottlenecks had followed the same path as in 2019, PPI inflation in the manufacturing sector would have been 2 percentage points lower in January 2021 and 20 percentage points lower in November 2021. (JEL F13, F14, F44) Federal Reserve Bank of St. Louis Review, forthcoming 2022.

Inflation and Wage Growth Since the Pandemic

“…Moreover, inflation in many developed countries has reached levels not seen in decades. Of course, on top of the effects of the fiscal boosts, there are other reasons behind this elevated inflation readings, such as disruptions to supply chains (Santacreu and LaBelle, 2022) and, more recently, the war in Ukraine (Caldara et al, 2022). Meanwhile, the labor market upheaval brought upon by pandemic lockdowns has largely been resolved.…”

The Aggregate Effects of Global and Local Supply Chain Disruptions: 2020–2022

“…Several recent papers have studied the effect of COVID in the presence of global production networks (Cakmakli et al, 2021;Bonadio et al, 2021) but do not consider the supply constraints related to the time to restock that we emphasize. Another literature considers, empirically, how cross-industry delays or backlogs affect industry prices or production (Alessandria et al, 2022;Santacreu and LaBelle, 2022). Recently, Cavallo and Kryvtsov (2021) has shown that COVID has substantially and persistently increased the retail stock out rate in the U.S. and around the world.…”

Global Supply Chain Disruptions: Challenges for Inflation and Monetary Policy in Sub-Saharan Africa

“…The volatility of supply chains and the prospect that these disruptions may remain elevated for a sustained period pose a significant challenge for monetary policymakers. There is growing evidence that supply chain disruptions have contributed to the recent increase in global inflation (e.g., Benigno et al 2022;LaBelle and Santacreu 2022;Finck and Tillmann 2022). One concern is that this effect could become entrenched, leading to expectations of permanently higher inflation that in turn could spill over into higher wage demands and higher prices for non-tradable goods and services.…”