Federal Reserve chair Jerome Powell said on Friday that Americans should be prepared for the global supply chain to remain in crisis through 2022 — and that the central bank is preparing to deal with the attendant challenges for the US economy.
Speaking at a Bank for International Settlements-South African Reserve Bank centenary conference, Powell warned that “supply-side constraints have gotten worse” over the course of the pandemic, while the supply chain and economic risks are “clearly now to longer and more-persistent bottlenecks, and thus to higher inflation.”
Already, those bottlenecks have slowed international commerce to a crawl as shipping containers loaded with goods wait to be unloaded and experts advise making an early start on holiday shopping.
In addition to packages taking longer to show up, consumers are likely also feeling the resulting inflation: The Consumer Price Index, a measure of the increase in the price of goods over a specific period, rose more than 5 percent in the 12 months ending in September, as Vox’s German Lopez explained.
However, Americans’ appetite to consume hasn’t diminished. After a brief dip at the beginning of the pandemic, people have embraced both e-commerce and brick-and-mortar retail as pandemic restrictions have eased. That’s good for an economy blitzed by Covid-19, but it’s also created its own set of challenges in the form of a backed-up supply chain that wasn’t built to weather a pandemic, and accompanying inflation as people buoyed by an economic recovery keep spending.
As Treasury Secretary Janet Yellen told CNN Sunday, that likely won’t be a permanent problem: She expects “improvement by the middle to end of ,” and pointed out that monthly rates of inflation are already declining from earlier this year.
Treasury Secretary Janet Yellen on inflation: "I expect improvement by the middle to end of next year." pic.twitter.com/ZaMtyEYwm8— The Recount (@therecount) October 24, 2021
For now, though, the Fed has some steps it can take to ease inflation, both in the short term and the long term. In the immediate term, as Powell said in September and reiterated Friday, the central bank will likely begin the process of “tapering,” or scaling back its purchases of government assets like Treasury bonds and mortgage-backed securities. The Federal Reserve spends about $120 billion per month on these assets to help fill the government’s coffers and fund the trillions in stimulus spending, which helped keep American markets afloat during the pandemic.
High demand, as partially represented by inflation and made visible by the current supply chain crunch, signals to the Fed that its stimulus purchases are having the intended effect and won’t be needed much longer, and it’s safe to gradually reduce them — probably by about $15 billion per month starting in November.
That could also ease supply chain issues by decreasing demand.
In the long term, the Fed could also increase interest rates, which limits the amount of money in circulation, thus decreasing demand and thereby inflation. But that’s on the back burner for now, Powell said Friday, as the Fed watches and waits to see if inflation will slow and the labor market will regain its strength.
However Powell and the Fed respond to inflation concerns, though, they won’t be able to fix the broken global supply chain — part of the reason inflation is so high in the first place — on their own.
The supply chain was already strained; Covid-19 pushed it to the breaking point
As Powell said Friday, inflation is being driven by high demand straining a supply chain that had issues even before the pandemic. But the global onslaught of Covid-19 knocked down that particular house of cards, and a healthy supply chain is still a fair ways off.
Out in the real world, the supply chain has been disrupted at practically every level, from the factories producing goods, to the ports where they’re supposed to be unloaded and sent to store shelves, as Vox’s Sean Rameswaram detailed on Today, Explained last week.
Starting at the manufacturing level, many businesses operate on a hair-trigger, “on demand” principle; they tend to make only what is projected to meet demand, because storing excess product in case of a supply chain or other crisis means manufacturers are spending more money on storage facilities — which they then can’t spend elsewhere, including on “bonuses for executives or dividends for shareholders,” as the New York Times’s Peter Goodman points out.
But during the pandemic, shuttered or understaffed factories couldn’t produce what people needed, and large manufacturers didn’t have reserve supplies because they weren’t designed to operate that way — meaning goods like toilet paper and hand sanitizer were missing from grocery store shelves.
Industry consolidation also contributes to supply chain chokepoints; if only one company produces computer chips, for example, there aren’t alternatives to draw on when the chip factory is closed, as many factories have been in different stages of the pandemic and continue to be in countries where vaccination rates are low.
When manufacturing powerhouses, particularly China, were able to manufacture and ship necessary equipment like PPE, those products were shipped in large containers to lots of places that don’t ordinarily export goods to China. So shipping containers full of PPE sent to places like Southeast Asian and African countries couldn’t easily justify a return journey. Now, a global shortage — or really, misplacement — of shipping containers has driven up the cost of shipping goods by tens of thousands of dollars, which then passes down to the consumer. A shortage of truckers to deliver goods by land has contributed to the crisis, too.
There’s also been a labor shortage as people fall ill or have to care for sick relatives, juggle child care and work, or, understandably, refuse to work for low wages in unsatisfactory conditions during a pandemic.
In the US, vaccinations are helping tackle one side of the problem; people are able to return to work safely, and child care outside the home is becoming increasingly available as schools and day cares reopen. Vaccine mandates have helped improve workplace safety, but widespread strikes and resignations over the general state of work in America also contribute to the supply chain crunch, and don’t appear to be ending any time soon.
All this leads to an astounding backup at ports on both coasts, with cargo ships anchored off the coasts of Savannah and Los Angeles, sometimes for days, as the ports scramble to store and ship all the cargo — otherwise known as the goods Americans are purchasing.
And now that global manufacturing is back up — and so is demand — the system is in shambles, writes Recode’s Rebecca Heilweil:
Global manufacturing has been operating at full capacity for more than a year. But without any slack to address worker shortages, bottlenecks, and delays, problems have only piled up. These issues have now reached a critical mass. So even though American consumers have started to order much more stuff, there’s no flexibility in the supply chain to accommodate that demand.
How American consumerism breaks the supply chain
Since the supply chain is a complex organism with lots of distinct parts, experts agree there will be no getting back to normal any time soon.
World Trade Organization Director-General Ngozi Okonjo-Iweala predicted last week at the Financial Times Africa Summit that the crisis could last for “several months” due to the “supply-demand mismatch,” which is poised to be exacerbated by the upcoming holiday season in many parts of the world.
It’s bigger than Christmas shopping, though: As the Atlantic’s Amanda Mull writes, it’s a question of rethinking our lifestyles as American consumers and how our ability and desire to buy affects the rest of the world.
If Americans buoyed by stimulus checks and discretionary spending directed more toward goods than experiences “could simply knock it off,” Mull argues — “it” being buying things we don’t really need or want — that would give a global supply chain stretched beyond its limits time to readjust.
Will that magically fix the interdependent, logistically complicated machine that is the global supply chain? No — but reducing outsized demand for a limited supply of goods could reduce both supply chain strain and inflation.
As Vox’s Terry Nguyen wrote earlier this week, Americans are not completely at the mercy of targeted Instagram ads or Amazon deals, as much as it can feel that way. Often, the motivation to buy is not based in need, but on our feelings — like boredom, sadness, or insecurity. Those purchases have repercussions not only for the economy, but also on the environment, and on labor practices throughout the supply chain.
While it’s not earth-shattering to decide against buying yet another striped sweater, gaming console, or flat-screen TV — it won’t fix climate change or give overextended and underpaid laborers better conditions or pay —it’s still a step toward taking some pressure off the broken supply chain.