Zheng Liu and Thuy Lan Nguyen
Global supply chain disruptions following the onset of the COVID-19 pandemic contributed to the rapid rise in U.S. inflation over the past two years. Evidence suggests that supply chain pressures pushed up the cost of inputs for goods production and the public’s expectations of higher future prices. These factors accounted for about 60% of the surge in U.S. inflation beginning in early 2021. Supply chain pressures began easing substantially in mid-2022, contributing to the slowdown in inflation.
Following the onset of the COVID-19 pandemic, global shipping and transportation costs surged, and delivery times and backlogs spiked to historically high levels. The resulting supply shortages added significant pressure to inflation.
This Economic Letter examines the quantitative contribution of global supply chain disruptions to the run-up of U.S. inflation during the past two years. Our evidence suggests that an increase in supply chain pressures can lead to a sizable increase in overall personal consumption expenditures (PCE) price inflation. Supply chain disruptions increase input costs and raise the public’s expectations for higher prices. We estimate that these effects contributed about 60% of the above-trend run-up of headline inflation in 2021 and 2022.
Measuring global supply chain pressures
We measure supply chain disruptions using the Global Supply Chain Pressure Index (GSCPI) constructed by the Federal Reserve Bank of New York (Akinci et al. 2022). The GSCPI summarizes information from 27 monthly indicators of transportation costs—such as the Baltic Dry Index, the Harpex index, and the Bureau of Labor Statistics airfreight cost indexes—and supply chain-related components from the Purchasing Managers’ Index surveys for manufacturing firms in seven major economies, including China, the euro area, Japan, South Korea, Taiwan, the United Kingdom, and the United States.
Figure 1 shows the GSCPI (blue line) from January 1997 to April 2023. The GSCPI is normalized to have an average value of zero over the full time series. The vertical axis indicates how many standard deviations the index is above or below the average. As global supply conditions change, the GSCPI fluctuates around its average level. For example, the spike in 2011 reflects disruptions to automobile production and distribution following Japan’s Tohoku earthquake and tsunami. The index climbed again in 2017, following the China–U.S. trade disputes. After the onset of the COVID-19 pandemic, the GSCPI jumped to unprecedented levels, over four standard deviations above its average value by the end of 2021. Since mid-2022, supply chain pressures have eased steadily, with the GSCPI gradually returning to its historical average.
Figure 1
Global Supply Chain Pressure Index and PCE inflation
Source: FRB New York, Bureau of Economic Analysis, and authors’ calculations. Gray shading indicates NBER recession dates.
Movements in the GSCPI are modestly correlated with those in headline PCE inflation (green line), with a correlation of about 0.53 over the full sample. This correlation partly reflects the surges in both series during the pandemic. In the pre-pandemic sample (1997–2019), the correlation was much lower, about 0.24. In estimating the effects of changes in the GSCPI on inflation, we focus on the pre-pandemic sample period from 1998 to 2019, to ensure that our findings would not be driven by the special pandemic conditions.
How does inflation respond to supply chain shocks?
The correlation between inflation and the GSCPI reflects the combined effects of a variety of factors. To isolate the effects of changes in suppl
