New York Fed warns supply chain issues may cause businesses to raise prices again

The impact of the COVID-19 pandemic brought manufacturing to a halt in critical factories worldwide, which led supply chains for many popular goods to break down. These supply chain bottlenecks have been cited as one of the causes of inflation, both in the United States and economies around the world. The breakdown of supply chains was paralleled with stable or rising demand; prices began to surge, and those increases were only bolstered by the Russian invasion of Ukraine, which upended energy resource markets. Increased energy costs meant that the transportation of goods became more expensive, which led prices to rise across good markets, even in sectors that have been less affected by supply chain disruptions.

Inflation has softened since 2022, but prices continue in sectors including housing and energy. These continued increases have pushed the Federal Reserve to maintain interest rates where they are as they await more indicators as to whether the economy is ready for a lower-rate environment. From January through April, the Bureau of Labor Statistics has reported 1.4 percent in the Consumer Price Index, which happens to be the same level of price growth seen over the same four-month period in 2023. Now, a new report from the New York Federal Reserve warns that supply chain issues could again begin to drive up prices, though the increase is not expected to be as dramatic as those recorded in 2021 and 2022.

Supply chain bottlenecks could drive inflation up once again

New research from the New York Federal Reserve on the strength of supply chains indicates that inflation is unlikely to be driven by bottlenecks in the production and transportation of consumer goods, as it was in the early stages of the COVID-19 economic recovery. The indexes used, which the Federal Reserve calls their “supply availability indexes (SAIs),” are now released every month, with that for May, finding that business owners were reporting issues with their supply chains at far lower rates than in 2021 and 2022. However, over the last few months, “supply availability has not been improving,” which has promoted some firms to increase prices because of the “lack of further improvement in supply availability.”

The Supplemental Survey conducted by the New York Fed found that “between a third and a half of businesses in the region are experiencing difficulties obtaining supplies” and that to compensate for these issues, “many are reducing operations and raising prices to compensate, though to a lesser extent than a few years ago.”

The drivers of inflation in the post-COVID recovery

This news comes as further research is done into exactly what causes of inflation led to the historic levels of price paid by consumers. The San Fransisco Federal Reserve published a paper in mid-May that argues that corporate price gouging or markups in prices beyond increases firms face in their production costs did not drive inflation in the early stages of the economic recovery. However, it says less about the practice in late 2022 and 2023, when prices continued to rise at slower rates than in previous years.

The findings from the SF Fed also conflict with other research on the topic that attributes over half of the price increases consumers feel to corporate greed. The Groundwork Collective found that in the first and second quarters of 2023, which falls outside of the timeline used in the SF Fed paper, “corporate profits drove 53 percent of inflation [...] and more than one-third since the start of the pandemic.” One argument put forward by consumer rights activists is that corporations exploited breakdowns in supply chains and high energy costs as a cover to increase prices beyond what would have been necessary to maintain their profit margin. Now, many corporations are realizing that they may have increased their prices by a rate that is driving away consumers and reducing sales. In response, Target and Walmart have announced by price cuts on thousands of products, in an attempt to lure customers back through their doors.