By Ken Kim, Senior Economist, Meagan Martin, Research Associate and George Rao, Senior Research Associate
Russia’s decision to invade Ukraine further complicates global supply chain challenges and will increase inflationary pressures. In our most recent chartbook, we note that persistent pandemic-related disruptions to the supply chain will mean continued shortages of goods at least through 2022 and likely beyond. U.S. businesses will need to consider on-shoring or near-shoring production, logistics management, and other measures to add resilience to their supply chain network.
Supply chain disruptions will contribute to elevated inflation in 2022
Supply chain inefficiencies can be caused by time delays, labor shortages, congestion on transportation routes, or lengthy customs processes. These inefficiencies have a cost, raising prices for consumers. The qualitative result has a similar effect to that of a tax or tariff that results in efficiency loss for the economy.
The recent surge in inflation—8.5 percent year-over-year in March—is due to a variety of factors, including supply chain issues. Supply chain issues have exacerbated price increases in industries with large increases in demand and shortages of key resources.1
Supply chain problems will likely only resolve when demand is below capacity for an extended period. On one hand, consumer spending on goods will remain strong because of the tight labor market and wage increases. On the other hand, the Federal Reserve has signaled more rate hikes are coming this year, which could dampen demand. On the supply side, ramping up capacity is not easy due to various constraints despite some industries being back to their pre-pandemic output levels. The current inflationary environment adds more challenges for businesses to plan and coordinate their production. Industry leaders vary on when they think supply chain constraints will ease, ranging from mid-2022 to later in 2023.2 Due to the following four reasons, we claim that supply chain issues will continue to contribute to inflation throughout 2022.