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How Supply-Chain Disruptions Are Impacting Inflation

2021-03-26

As supply-chain disruptions cause delays and higher prices, Global Investment Research’s Joseph Briggs explains the impact on inflation and the rates market. 

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
Welcome to our exchanges at Goldman Sachs markets updates from Friday March twenty six. Each week we checked with leader across the firm to get a could take on what they're watching in markets this week, we're looking at global supply chains, topic that much in the news and what the problems and issues they are mean for producers, consumers and the economy objects. but go ahead of communications at the firm in today delighted to be joined by Joseph brings an economy. Goldman Sachs Research, who recently published a report looking at this topic, specific glee, Joseph Walker, the problem, it's great to be speaking with tragic centre, the problems with global supply chains began pretty early in the pandemic when manufacturing facilities in China just shut down, and we all went scrambling for some basic goods a year later, the disruptions in supply chains are still wreaking havoc, but it's all differ so
Please understand the nature of the challenges facing supply chains and what's changed since the pandemic began. Now we ve really treatise thanks, stories play out over the last year, Jack disruption from last spring pretty easy to understand. Since it's hard to get parts and inputs from factories in China that are completely shut down. The current disruptions are a bit more complicated and a bit more tied to the overall macro picture. So last spring a lot of manufacturers to started to cut back. And production because expected the incomes and spending would fall at the way did they typically do in a recession. Instead, the opposite happened income surge, do too generous fiscal support and spending on goods actually picked up fight, a bet because house what had money to spend, but normal consumer services that they would spend on for largely Annabel the Good NEWS about this, urging the demand is that it led to a quick recovery for the manufacturing sector. The bad who says that many manufacturers had anticipated it, and so therefore,
they haven't, ordered enough inputs imparts to meet the rising demand and getting inputs prove very difficult in the middle of a global pandemic. Even when trade partners in international suppliers were able to produce the things that you s, manufacturers need it getting him to the: U S was a problem because a virus was weighing on international shipping the combination of high demand and limited supply for international shipping, Letchworth shortage, containers import congestion problems, particularly along the West Coast. This been turned: let's lengthy shipping delay. Which explain most of the Kurds pitching disruptions, although other events like the winner forms and taxes and a ship getting stuck in the Suez Canal, certainly haven't house so give us a luminous censor the scale of what happened and how much it really matters. The most striking. the creation of just how problematic the supply chain disruptions currently are comes from measures of delays and supplier deliveries from some of the Federal Reserve's business servants. These measures, factually spite to their highest level and forty years
additionally, these same surveys show that the vast majority of manufacturing firms pearly report- the supply chain reactions, are complicating their production. Additionally, in our report, who founded illuminating, just to look at some of them. More anecdotal reports were covered in the popular press. We did them all and organise the men at a table, but we really found this exercise really lighted just how widespread supply chain disruptions art with everything from cars and electronics. Two boats heroic states being affected, not dimension, bicycles, minutiae, anecdotes by local bike shop. Honour tracks is inventory now from Taiwan, which he never used to do before, but he's got much more savvy about supply chains, our the supply chain, issues affecting consumers more broadly, the real economy, the mainland, consumers does it. There will be some delays and receiving the goods they order. Like banks, for example, my problem is invites, but I do have a per week was it. I ordered in December that now I think, should arrived just in time for summer. However, we think that these anecdotes, really just primary
reflect, inconveniences and not real problems. Our outlook is a good man will remain pretty strong, particularly after the arrival of the latest round of stimulus checks. We think that supply chain disruptions could have a slightly larger impact on some specific producers. For example, they ve been reports about carmakers. Having caught production, do too semiconductor shortages. However, we something that most of these effects will be pretty modest. Unlike last spring, most of the current supply chain disruptions reflect transportation and not production This means that a lot of manufactured in the? U S are able to find work around. For example, we found some reports about importers, moving ships to alternative ports, and others have turned tat air rather than secret. That said, these work around are not really cheap, and we ve seen crises increased by quite a bit along some of the more stress trade about, for example, ship rates from EAST Asia have increased by around three hundred percent over the last year. Well,
you got to use those glove somewhere in Greenland or Iceland. The summer some were called the costs associate with the shipping and transportation logistics are raising concerns about inflation. What's your view on the outlook for inflation because of these disruptions? So when users account or higher shipping and supply costs. They have two options: they can either absorb them or they can pass months consumers. We think that a bit of both behind then. But we see several reasons why the ultimate impact on consumer prices will be smaller than some of the crazy. What we ve seen, for example, along the EAST Asia: U S, shipping rout first, most shipping costs Outside of these really stressed, trade, Browed haven't increase out much for exam for domestic shipping, which accounts for about three quarters of the total shipping costs for making a good in the United States. I've only increase by one point: six percent, the seconds, shipping, cosmic by themselves, only reflect about three percent of the total cost of making you get given that both of these number
Pretty small, it's probably not u surprising, that we find a pretty small effect on consumer prices over all. We think that shipping costs currently boosting year by year, core consumer prices by about buying basis points a notable, but fairly limited increase. Looking ahead, we think that elevated, the thing rates will keep boosting consumer prices a bit for the rescue, twenty twenty one before becoming an outright dragon. Twenty twenty two, this primarily reflect set as the economy reopens the middle of this year will see some spending ship back from goods to services, which was mediate. Some of that a man pressure that we ve seen on durable goods. We also expect that, as the rest of the world gets vaccinated, some of the time a groundswell normalized will alleviate some of the constraints on international shipping right. So the circle of it more about inflation as inflation expectations, are big determinant of treasury yields and rates more broadly, which have been rising of late. If, as you say, supply chain issues start to abate, how will that affect the rates market?
The recent rise in rates is partially explained by the markets, pricing, a firmer inflation and, as we just mentioned, we do think that supply chain. This and our boosting inflation, a bet, but it's hard to explain current prices without allow for some possibility. Ivan overheating scenario that some commentators have been very concerned about, it certainly pass but we do see upward price pressure later this year from basic facts and the combination of the different growth impulsively thinker, really gonna be driving the economy and twenty twenty one. However, we ve been less concerned about the risk of persistent overheating, mostly because the fiscal stimulus is one often nature, and a lot of these they think should fade pretty quickly. At twenty point, too, we have A similar view on the impact of supply chain disruptions, which we think should alleviate some of the pressure and its prices as they start to fade later. This year now we do expect the court
inflation will remain pretty firm. For the rest, we twenty twenty one and well it's twenty twenty two, but this largely reflects higher upstream commodity prices and industrial goods. I said that art necessarily directly related supply chain disruptions. However, as supply constraints ease, this could lower the perceived risk about proceeding which might lower that inflation risk premiums. lay contributing to market prices, or I Joseph will keep an eye on the West Coast shipping ports thanks for joining us today, it was great speaking with Egypt, concludes. This episode exchanged Goldman Sachs thanks for listening, and if you join the show report, you subscribe an apple pie castle, liberating our common. This package the quartet on Wednesday March, twenty fourth, two thousand twenty one, all price references and market forecasts correspond to the date of this recording. This podcast should not be copied, distributed, published or reproduced in whole or in part. The information contained in this package does not constitute research or
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Transcript generated on 2021-07-01.