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Macroscope | Supply chain crisis: why central banks should avoid overreacting to higher inflation
- Inflation might be higher in this economic cycle than the last, but the current elevated rate is likely to represent the high point
- Further burdening the economy with tighter policy could threaten the recovery central banks have worked so hard to nurture
Reading Time:3 minutes
Why you can trust SCMP
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Ballooning global fossil fuel prices, threats of power shortages in China and Europe, panic buying of petrol in Britain, semiconductor shortages affecting carmakers, and scores of container ships stuck outside US ports have dominated headlines in recent weeks.
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They all share one underlying driver – a supply chain crisis that could stoke inflation just as global growth momentum is slowing. While the market’s concern over stagflation may well be exaggerated, navigating supply chain issues presents challenges for policymakers and investors alike.
Amid the pandemic, a large portion of global economic activity briefly ground to a halt. Disruptions to supply chains were both inevitable and unpredictable.
The unprecedented sharp drop in activity created a so-called base effect. This led to big jumps in many economic indicators that use year-on-year growth rates to compare current levels to depressed prior-year readings. This includes inflation as well as GDP, but this effect has also made this year’s energy price increases look larger, given how much they plunged in 2020.
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The fiscal policy stimulus unleashed in response to the pandemic found its way disproportionately into goods rather than services as lockdowns and travel bans remained in place.
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