Inflation and supply chain problems

When U.S. inflation began accelerating last year, economists pointed to an obvious reason: The explosive rebound from the pandemic recession had ignited demand that overwhelmed factories and ports. The result was severe shortages of vital parts and manufactured goods — and inflated prices.

Now, supply chains are unsnarling. The Port of Los Angeles handled 25% less cargo in October than it had a year earlier.

Still, prices keep surging: In October, consumer inflation over the previous 12 months amounted to 7.7%. Though that was the smallest year-over-year increase since January, it still signaled painfully high inflation.

The Associated Press spoke recently with Phil Levy, chief economist of the supply chain consultancy Flexport.

How much are supply chain bottlenecks easing?

If you ask, how long does it take to move stuff, there has been notable improvement. If you measure it by how long would it take to get cargo from Asia to a destination port, dramatically better. Ocean shipping prices are down very sharply across the Asia Pacific, a little less so in the Atlantic.

Why are things improving?

During the pandemic, you had some very sudden spikes in demand. Durable goods orders were something like 35% more in the spring of ’21 than they were in February of 2020. That stuff has eased off. We’re not seeing these giant spikes in growth. We’ve been holding fairly steady.

So are the supply chain problems over?

Before, it was: Can you get things into the port of LA/Long Beach, or is your ship just anchored offshore waiting in the queue? The questions now are like: If you bring something in now, do you have

warehouse space where you can put it?

What are the implications for inflation?

A year ago, the retailer who had a bare warehouse ,( because clogged supply chains meant he couldn’t stock up) wasn’t going to do some giant Black Friday sale and clear everything out. Now, he might say: “Yeah, let’s have some sales.’’ That’s where you see the things translating into prices.

But inflation isn’t going away quickly, right?

Goods inflation has been coming down. But services inflation has been going up and doesn’t look like it’s going away fast. This is part of what’s worrying the Fed. Inflation expectations are another thing. Your boss offers you a 4% pay increase. Do you say: “Wow, my boss loves me. I got a 4% pay increase!’’ Or do you say: “Hold on, I think inflation’s going to be 5½ percent. That's a real pay cut.'' Once everybody starts thinking about inflation as a 5% to 6% kind of thing, getting that back to 2% is tough.