The COVID Inflation Shock is Now Over

The global economy reopened following COVID, causing supply chain disruptions around the world as pent-up consumer demand stretched manufacturing and shipping capacity, resulting in severe delivery delays and significant mark-ups embedded in the prices firms charged consumers globally.

This Global Macro Views update builds on work done in 2021, tracking the magnitude of supply chain disruptions and mapping them into producer price and CPI inflation.

Delivery times have essentially normalised around the world, reducing the shock to supply chains and the resulting upward pressure on inflation.

It would be nice to think that this puts an end to the global inflation scare, but that is not the case. The war in Ukraine is pushing up global inflation, particularly in Europe.

“We published a series of Global Macro Views last year that examined the impact of COVID reopening on global supply chains. We used three global manufacturing PMI components: I delivery times; (ii) input prices, which firms pay for raw materials used in production; and (iii) output prices, which firms charge consumers, with the difference representing the mark-up.

“These measures are converted into Z-scores by subtracting their historical means and dividing the difference by the standard deviation. As a result, these metrics are comparable across countries,” says the International Institute of Finance.

Exhibit 1 depicts these series for the United States. Stretched delivery times were equivalent to a seven standard deviation shock at the peak of the COVID supply shock, a truly massive shock. Exhibit 2 shows that delivery times in the Eurozone were similarly stretched.

In both cases, delivery times have returned to near-normal levels in comparison to the past. However, there are price differences between input and output. While both have fallen sharply in the United States, output prices in the Eurozone remain elevated, indicating that Russia’s invasion of Ukraine is hitting Europe especially hard through mark-ups firms embed in the prices they charge consumers.

This picture is confirmed by looking at Germany (Exhibit 3) and the United Kingdom (Exhibit 4). Delivery times have almost normalized, while output prices remain very elevated.

How has the global picture on delivery delays and mark-ups changed from a year ago? Exhibit 5 shows supplier delivery times for August 2021 on the horizontal axis, while it has mark-ups for the same month on the vertical axis. Exhibit 6 is the same thing for August 2022.

It remains the case that the mark-ups firms charge are positively correlated with delivery times, but – other than that – the picture is radically different. Across the board, delivery times have fallen, while it is European countries that have especially pronounced mark-ups, as high energy prices due to Russia’s invasion of Ukraine feed into these mark-ups.

“As a result, while the inflation shock from supply chains has faded, the coast is far from clear, because another supply shock has come along to cloud the inflation picture.”