Data released Wednesday by the Federal Reserve Bank of New York showed the Global Supply Chain Pressure Index (GSCPI) rose sharply to 1.82 in April, from March's 0.68. The reading sits just below the 1.86 peak recorded in July 2022 and represents the largest monthly change since March 2020, when the COVID-19 pandemic spread through the global economy.
The April surge reflects disruptions from the conflict triggered by President Donald Trump's attack on Iran. The fighting has brought trade through the Strait of Hormuz to a virtual standstill and has pushed energy prices higher around the world. There has been no resolution to the conflict that allows trade flow to resume.
New York Fed President John Williams said on Monday that notable supply chain pressures have begun to boil and recent data show the situation echoes the severe shortages and supply disruptions the world economy faced as it emerged from the pandemic in 2021. Pandemic-era disruptions paired with government stimulus drove US inflation to its highest level in decades; price growth still has not returned to the Fed's 2% target.
Trump's import-tax surge and war-driven energy costs are filtering through inflation readings as renewed price pressure. Fed officials have pulled back from earlier expectations of a rate cut this year and are increasingly considering steady rates well into next year, or even a hike. The Federal Open Market Committee (FOMC) left its benchmark rate in the 3.50%-3.75% range Wednesday, citing inflation concerns from the US-Israeli war with Iran.
Economists at Evercore ISI estimate underlying inflation measured by the personal consumption expenditures index will run just under 3% in the fourth quarter. Roughly 50 basis points of that comes from tariffs, oil and supply chain disruptions, plus another 20 basis points from AI cost spillovers. Financial markets expect the US central bank to keep interest rates unchanged well into next year.
Key Takeaways:
1. GSCPI surged to 1.82 in April from March's 0.68, just below the July 2022 peak of 1.86.
2. The monthly jump is the largest since March 2020 when the pandemic struck the global economy.
3. Trump-Iran fighting at the Strait of Hormuz has halted trade flow with no diplomatic resolution in sight.
4. FOMC kept the benchmark rate at 3.50%-3.75%; markets price in steady rates well into next year.
5. Evercore ISI forecasts Q4 core PCE inflation just under 3%, with 50 bp from tariffs, oil and supply chain disruptions.
