Bottlenecks in the world economy have been a key reason for high inflation among traded goods. This post explores Bank staff analysis on the key drivers behind these bottlenecks.
Bottlenecks in global supply chains have been an important driver of inflationary pressures across the world, increasing prices of tradable goods. These emerged as supply disruptions – for example from Covid-related lockdowns in some key producer economies – interacted with the strong recovery in global demand from the pandemic.
We summarise movements in global bottlenecks using our ‘global supply chain index (SCI)’. This relatively simple measure, constructed by extracting a supply component from global purchasing managers’ indices (PMIs), rose sharply in 2021 (Chart A). Despite easing slightly in recent months, they remain elevated.
Chart A: Global supply constraints have been a key driver of inflation
Indicators of supply constraints (a)
Footnotes
- Sources: Caixin, JPMorgan, Refinitiv Eikon from LSEG, S&P Global and Bank calculations.
- (a) Indicators are estimated by Bank staff using principal component analysis on a range of PMIs for supply constraints in the manufacturing sector (supplier delivery times, stocks of purchases, stocks of finished goods, input prices and backlogs of work). Before principal components are estimated, these indicators are regressed on the new orders PMI to control for movements in demand.
There have been a few key drivers of supply chains disruption. Strong US durable goods consumption relative to normal, supported by significant fiscal stimulus, outstripped the recovery of global supply capacity. Disruption to global shipping resulted in sharp increases in shipping costs. More recently, Covid-related lockdowns in China have disrupted production in some cities.
We have tried to estimate the effect of these different drivers, by constructing a model-based decomposition of movements in our Global SCI. Chart B shows the results: US durable goods consumption was the main driver of the rise in our SCI in 2021; global shipping costs contributed to a lesser extent; and disruption from China spiked periodically during lockdowns.
Chart B: There have been a few key drivers of global supply constraints
Decomposition of supply constraints (a)
Footnotes
- Sources: Harpex Petersen, Refinitiv Eikon from LSEG, S&P Global, JPMorgan, US Bureau of Economic Analysis and Bank calculations.
- (a) We estimate a structural vector autoregression with the following variables: the Global SCI; the share of durable goods in total US consumption; the Harpex shipping index; and the China SCI. We use short-run restrictions to estimate the response of the Global SCI to structural shocks. The Global SCI responds to US durable goods consumption with a one-month lag, and contemporaneously to the Harpex index and the China SCI.
The aqua bars in Chart B are moves in the SCI that our model cannot explain. Considering that these bars widened materially since the beginning of 2022, it is plausible that higher energy prices and disruption caused by the war in Ukraine could be a constraint on supply.
Over 2022, the impact of some key drivers appears to be waning, as US goods consumption moderates, and China re-emerges from lockdown. If these factors continue to ease back, we would expect the Global SCI to fall further and support a gradual easing in world goods price inflation. But there remains significant uncertainty regarding the outlook for global bottlenecks.
This post was prepared with the help of Julian Reynolds and Tom Wise.
This analysis was presented to the Monetary Policy Committee in July 2022.
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