Easing supply-chain pressures should help reduce core goods inflation

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Global supply-chain disruptions are beginning to unwind as shipping rates decline, the time taken to deliver goods falls quickly, port congestion eases and the backlog of orders is cleared, raising the prospect of lower core goods (excluding energy) inflation ahead, Fitch Ratings says in its latest Economics Dashboard.

The cost of shipping freight has declined by as much as 70% on some routes since September 2021 while transporting cargo now takes around 90 days instead of 122 days in April 2022. Congestion at US ports has dropped significantly, falling by close to 80% since last November. The latest manufacturing PMI index also showed that order backlogs are being cleared more quickly and supplier delivery times are falling fast.

A slowdown in consumer demand for durables is helping to ease supply-chain bottlenecks as households’ purchasing power is dented by increases in interest rates and higher inflation. Surveys show the share of US consumers planning to buy big-ticket items is also falling, pointing to further declines in the annual growth rate of spending on durables. There are also signs of semiconductor shortages starting to ease as the time taken to deliver them appears to have peaked. Korean inventories of semiconductors rose at the fastest rate since 2016 while growth in shipments has fallen rapidly.

Just as core goods inflation rose sharply last year when sales outpaced inventories, rising inventories-sales ratios today could be consistent with falling goods prices inflation in some sectors. The manufacturing PMI prices index is also slowing quickly.

However, risks to the supply chain remain given China’s zero Covid-19 policy, which could result in renewed disruptions to China’s export ability while gas rationing in Europe may affect industrial supply chains. Nevertheless, recent improvements to global supply chain pressures are encouraging.