The RSM US Supply Chain Index improved to 0.19 standard deviations above neutral in August as inventories and industrial capacity utilization continued to rebound. That marked the second month in a row of supply chain efficiency after nearly three years of being underwater.
While it remains too early to say whether supply chains have completely rebounded, the improvement should provide much-needed relief to current inflation concerns.
We estimate that the supply chain disruptions of the past year and a half have contributed to about a third of the overall price increases.
If July and August marked the true turning point of the supply chain issue, then what the Federal Reserve had said was transitory would have lasted for about 12 months.
In hindsight, that was also roughly how far the Fed has been behind the inflation curve. Because monetary policies often come with a lag, it should take at least 12 months for inflation to come down meaningfully.
It is not a surprise that the Fed, in learning from its mistake, has been clear on its commitment to bring inflation down despite the possibility of some economic pain.
Our study shows that to bring inflation down to the 2% target would result in the loss of more than 5 million jobs. But we believe the Fed could tolerate a 3% inflation rate in the short to medium term, which would result in the loss of 1.7 million jobs.
But it does not matter which scenario the Fed chooses; the possibility of crafting a soft landing is slim and the labor market remains the last line of defense from descending into a recession.
The takeaway
There is plenty of room for supply chains to improve as overall demand stress continues to slow. Any upside surprise coming from the supply side should further help the fight against inflation while keeping economic sacrifices under control.
