During the pandemic, global supply chains across the world were disrupted by a range of causes including shifts in demand, labour shortages, and missing componentry. From chip shortages shuttering car plants for weeks to shipping delays and soaring costs, the pandemic shone a spotlight on global supply chain deficiencies. This proved a major factor leading to the spike in inflation. But some rare good news: we are almost back to normal!
Source: Daily Chartbook, New York Federal Reserve
During the last 3 years, global supply chains buckled under the strain of constricted logistics capacity. On average, global container shipping rates more than quadrupled since pre-pandemic days and delays soared. In some key trading routes, such as Asia–Europe and Asia–North America, the rate spikes were even higher and the delays more frequent.
Geopolitical risk was also a factor. The shortage of computer chips, used in modern cars for anything from brakes to seats, was one example of the danger of relying on “just in time” production. Now the focus has switched to “just in case”. One reason why the chip shortage was so severe for American car manufacturers was that US-Chinese tensions led US companies to shift from suppliers in mainland China to Taiwan’s TSMC.
Apart from pandemic lockdown issues and US-China issues, the Russia-Ukraine war compounded an already strained global supply chain situation. Existing restrictions imposed on Russia continue to impact fuel costs, and while freight markets have limited direct exposure to Russia and Ukraine, global logistics have had to contend with increasing risk factors, including restrictions to airspace, uncertainty on the future path of consumer demand, and ongoing bottlenecks.
But as indicated in the chart above, we appear to be getting back to a more normal situation. As an example, freight and shipping costs have fallen dramatically. Hopefully, supply chain “normality” will help overcome the inflationary pressures we are still contending with.
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