By Michael S. Derby
NEW YORK, June 4 (Reuters) – Global supply chains remained under pressure in May as a result of the war in the Middle East, data from the New York Federal Reserve showed on Thursday, suggesting inflation pressures will remain formidable for the foreseeable future.
The regional Fed bank’s latest Global Supply Chain Pressure Index ebbed modestly to 1.77 from an unrevised 1.82 in April. The index remains in the vicinity of readings seen in the latter part of 2022.
The U.S.-backed war with Iran and resulting shutdown of the vital Strait of Hormuz waterway has sharply impeded the flow of oil and other goods critical to the global economy. The disrupted supply chains hark back to similar conditions during the COVID-19 pandemic, which helped set the stage for a massive surge in inflation that has not been fully contained.
The New York Fed data echoes other findings. The Institute for Supply Management’s factory sector survey on Monday noted rising challenges for factory operators in getting the inputs they need, as well as rising prices tied to the war.
“One of the things that worries me … is the supply chain disruptions” tied to the conflict, New York Fed President John Williams said last week. “That’s the thing that really hit us and most countries in the world very hard during the pandemic.”
While he noted very elevated levels of inflation at this time, Williams said he continues to believe price pressures will wane after the war is resolved and trade again begins to flow normally.
Earlier last month, Boston Fed President Susan Collins warned that “if shipments through the Strait do not resume soon, global economic strains, which are already high, especially in Asia, will intensify, and this would increase knock-on effects on global supply chains and exacerbate inflationary pressures, as well as adverse effects on the domestic economy.”
INFLATION WORRIES CLOUD FED OUTLOOK
The supply chain disruptions and the hit to inflation caused by the war have created a challenging outlook for the Fed.
The Fed is expected to leave its benchmark interest rate in the 3.50%-3.75% range at its June 16-17 policy meeting. Financial markets, however, are betting that high inflation will eventually force the central bank to lift interest rates.
In an interview with Yahoo Finance on Wednesday, Williams said he didn’t see a need to change the Fed’s policy rate at this time.
Cleveland Fed President Beth Hammack, however, said on Tuesday policymakers may need to consider raising rates if inflation pressures don’t abate soon, especially considering that inflation has run above the Fed’s 2% target for years.
Hammack also warned that supply chain problems will continue for a while.
“What I’ve heard from business contacts, particularly in the energy sectors, is that even if the Strait was opened tomorrow, it’s going to be months before we actually rebuild that flow of oil,” she said.
(Reporting by Michael S. Derby; Editing by Paul Simao)
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