The Supply Chain Is Suffering From Long Covid

The Supply Chain Is Suffering From Long Covid
Stéphane Renevier, CFA

almost 2 years ago2 mins

Global supply chain disruptions – many of them caused by Covid-era lockdowns – have been a major driver of the inflation we’re still seeing now. With factories closed and transportation of goods thrown out of whack, supply was slow to meet the rising demand, pushing up prices across the globe. So you’d think that the reopening of most economies this year and the easing of restrictions would ease the pressures in global supply chains. But worryingly, they haven’t.

In fact, the NY Fed’s Global Supply Chain Pressure Index – a measure which integrates a number of metrics to provide a snapshot of supply disruptions – reached an all-time high in January of this year, five standard deviations above its long-term average. To say that’s rare would be an understatement: a deviation that extreme in theory happens just 0.00006% of the time.

And while pressures eased to 3.5 standard deviations higher in the latest data from February, the supply chain is by no means out of the woods. In fact, it’s got two new issues to deal with: new Covid lockdowns that are paralyzing parts of China, and the war in Ukraine. The longer these pressures hang about, the longer we’ll have to deal with higher inflation.

What’s more, since a major source of inflation is disruptions in the supply, central banks’ interest rate hikes – which serve to reduce demand – might not be as successful as hoped in tamping down price increases. Instead, they’ll probably just drive up the probability of an environment of low growth and high inflation – otherwise known as stagflation. That’s the worst possible macro environment for risky assets, so you may want to play it extra safe: reduce your risk exposure, diversify as much as you can, and hold a bit more cash in your rainy day fund.

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