It’s been a week since the container ship Dali crashed into the Francis Scott Key Bridge in Baltimore. The ship is still there, and the images remain astonishing, in part because it is so large compared to the remains of the bridge. How did planners not realize that operating super-sized ships in the confines of a port poses risks?
And the Port of Baltimore remains closed as ship and bridge debris block entrance to the port. How big is that for the economy?
Well, if it had happened in late 2021 or early 2022, when global supply chains were under huge pressure, it would have been a pretty big problem. Remember when ships were plying back and forth in front of Los Angeles waiting for anchorage?
It’s not that important now. Before Dali, Baltimore was only her 17th busiest port in the United States, but it clearly has enough spare capacity to divert most of the cargo that would normally pass through Baltimore to other East Coast ports. be able to. The ship “Dali Is No Ever Given” ran aground and blocked the Suez Canal in 2021.
Still, Baltimore isn’t the only problem, and global supply chains don’t have as much headroom as, say, last summer once the pandemic disruptions are largely behind us. The Panama Canal is operating at reduced capacity because a historic drought (likely due in part to climate change) has limited the supply of water to fill the canal’s locks.
Elsewhere, the Houthis have fired missiles at ships entering and leaving the Red Sea, namely the Suez Canal. Perhaps as a result of these and other issues, the New York Fed’s widely cited indicator on global supply chain pressures has improved since last year, although the red flags it showed in the winter of 2021-22 have not yet come on. It has gotten significantly worse since March.
And given what we know about the causes of the 2021-2022 inflation spike, this deterioration makes me a little concerned.
I think it’s fair to say that the vast majority of economists have been caught off guard in some way by the inflation trends of the past three years. Like many others, I couldn’t have predicted the initial big rise in inflation. But even most economists who got that part right seem in retrospect to have been right for the wrong reasons. That’s because they couldn’t predict the “perfect disinflation” of 2023. Despite no recession and what some claim is high unemployment, inflation has plummeted. This was necessary to reduce inflation, but it never materialized.
Side note: Official indicators on inflation were slightly higher in the first two months of 2024. But much of this probably reflects the so-called January effect (actually spanning January and February), where many companies raise prices. With the arrival of the new year. The Fed and many independent economists expect disinflation to resume in the coming months.
So what explains the rapid rise and fall in inflation? Back in July 2021, White House economists said we were in a situation similar to the inflation spike that began in 1946. In other words, he argued that the recovery from the new coronavirus has created a situation similar to the early postwar period, when there was stagnation in demand and supply chain disruption. The post-war inflation surge ended relatively quickly after two years, with high unemployment rates not lasting for a long time.
In retrospect, that analysis seems spot on, as much the same thing appears to have happened in recent inflation cycles.Continue mike konczal A Roosevelt Institute professor who just joined the Biden administration said that the unemployment rate versus core inflation (measured as consumer prices excluding food, which is the highest figure available dating back to the 1940s) The following changes are plotted.
As you can see, 2023 looks like the late 1940s and not like the Volcardi inflation of the early 1980s as inflation pessimists predicted.
A recent White House analysis adds additional numbers to this diagnosis, using New York Fed metrics to estimate the Phillips curve (an equation that supposedly tracks inflation) that includes the effects of supply chain pressures. According to this model, supply chain pressures (and the interaction of these pressures with demand) accounted for most of the rise in inflation above the Fed’s 2% target over the past few years.
Conversely, the model attributes most of the disinflation after 2022 to easing supply chain problems as companies adapt to economic changes.
This all makes a lot of sense, and until recently I was pretty comfortable about the prospect of a soft landing, that is, inflation falling to an acceptable level and unemployment remaining low.
However, if we believe that supply chain disruptions are the main driver of inflation, and that mitigation of these disruptions is the main driver of disinflation, then we need to worry about the impact if supply chain conditions deteriorate again. be.
Well, today’s supply chain problems are not as severe as they will be in 2021-2022. If the Dali disaster had happened at that time, bridges really far away would have collapsed. All that’s happening is a return to normality after a period of below-normal supply pressure, at least by New York Fed standards. This may not have much of a negative impact on inflation.
But I’m not as sure about this as I’d like. We are once again concerned about the supply chain.
quick hit
One difference from the 1940s is that price controls were never a serious prospect.
Immigration and the post-corona US boom.
