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Inflation: Supply issues are improving as demand wavers

(NewsNation) — While the Federal Reserve continues to raise interest rates in an effort to cool demand, data suggests one of the other drivers of inflation — pressure on the supply side — has improved.

“There’s clearly been some sort of resolution on supply-side issues affecting inflation, but they’re not entirely gone,” said Marc Jarsulic, chief economist at the Center for American Progress.

Jarsulic pointed to the change in commodity prices — which include apparel, new and used vehicles, and other household supplies in the Consumer Price Index (CPI) — as one sign that supply chains are stabilizing. With food and energy removed, last month those prices grew 1.5%, year-on-year, down from an 11.7% growth rate in March 2022.

The slowing commodity price growth suggests global supply chains are starting to bounce back after being hit hard during the pandemic. That’s important, because further supply improvements may help slow overall inflation moving forward.

An analysis by the Federal Reserve Bank of San Francisco shows supply-driven inflation has outstripped demand-driven inflation in six of the last 12 months.

Other metrics also suggest supply chains are returning to normal.

The Logistics Managers’ Index — which measures logistics activity across eight different components — fell to its lowest level in over six years in March. Most of that decline was driven by falling transportation prices, which hit an all-time low for the index.

Zac Rogers, one of the researchers behind the analysis, said the latest report is a sign freight activity has slowed but also that supply chains are stabilizing after the pandemic caused backups at U.S. ports and triggered inventory crises at American retailers.

That disruption made supply chains less flexible, less predictable and ultimately more expensive,

“What you want are for supply chains to function like traffic: swift, even flow,” said Rogers, an assistant professor of operations and supply chain management at Colorado State University. “The stopping and starting is where it gets messed up.”

After hitting an all-time high in March 2022, logistics costs have fallen over the past year. That’s bad news for trucking companies who have pointed to a “freight recession,” but it could be good news in the fight against inflation.

Across all items, year-over-year inflation has slowed, hitting 5% last month. That’s down from 9.1% in June, but still well above the 2% target.

If prices do fall, Rogers thinks supply chains are now better equipped to handle a surge in demand.

Despite the good news on the supply front, it remains to be seen how much consumers will benefit from today’s lower logistics costs.

Hitha Herzog, a retail analyst and chief research officer at H Squared Research, is cautiously optimistic but thinks price reductions will vary.

“I think that question just depends on the retailer, and of course what happens to inflation going forward in the next couple quarters,” she said.

If the industry can avoid another black swan event, then consumer prices could fall, Herzog said.

Recent data suggests retailers are already preparing for an economic slowdown. Last quarter saw a sharp reduction in business inventories, which subtracted roughly 2.3 percentage points from the economy’s overall growth.

New data released Friday shows growth in consumer spending flatlined last month and has been decreasing since the beginning of the year.

Many economists expect a recession sometime this year, though the severity and duration of that downturn remain unclear.