Inflation in goods normalized, but has exploded in services where there are no supply chain issues.
By Wolf Richter for WOLF STREET.
The Global Supply Chain Pressure Index (GSCPI) for February dropped below the historical average for the first time since August 2019. The historical average (green line = 0 in the chart below) is based on data going back to 1998.
The unnerving supply-chain chaos during the pandemic has now been completely unwound. The chaos was caused when massively overstimulated consumers, particularly in the US, but elsewhere too, blew their pandemic trillions on goods, creating such demand for goods, and so suddenly, that no one was ready for it, and the global production and transportation system essentially locked up – causing large-scale shortages across numerous unlikely and unrelated products – including amazingly, the now infamous WOLF STREET beer mug shortage.
Some of those products, particularly used and new vehicles, then spiraled into all kinds of crazy price spikes that were responsible for the initial and sudden outbreak of rampant inflation.
For example, used vehicle prices spiked by over 40% year-over-year at the peak, though used vehicles, ironically, were never in a shortage and weren’t waylaid by containers piling up at ports around the world. It was one of the weirdest consumer-behavior phenomena ever, telling a story about the inflationary mindset – mass psychology – rather than shortages.
This rampant inflation in goods – such as in used and new vehicles, electronics, apparel, sporting goods, (remember the shortages of bicycles, rowing machines, camping and trekking equipment?) started abating in early 2022, as supply chains began the slow process of getting untangled.
But by then, inflation had shifted to services. And as goods price increases began to moderate, or even backtrack, such as with electronics and used vehicles, the services inflation rate exploded, fueling further inflation fears:
The Global Supply Chain Pressure Index is another indicator that the goods-based economy has normalized, while inflation is raging in services that are largely unaffected by supply chains.
The GSCPI was developed by the New York Fed’s Applied Macroeconomics and Econometrics Center in response to the pandemic-era supply-chain mess. It uses data from the transportation and manufacturing sectors going back to 1998, including the Baltic Dry Index, the Harpex index, airfreight cost indices from the Bureau of Labor Statistics, and supply chain-related components from the Purchasing Managers’ Index (PMI). It focuses “on manufacturing firms across seven interconnected economies: China, the euro area, Japan, South Korea, Taiwan, the United Kingdom, and the United States,” according to the New York Fed.
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