Supply chain bottlenecks improved in April yet remained significantly underwater.
At the current pace, a full recovery will not take place until the first half of next year, implying that inflation will remain above the 2% target rate for the rest of this year and much of next year.
While the impact of the lockdown in China was somewhat muted in April, the summer months—when most businesses stock up for the holiday season—will give a much better indication of what inflation will look like.
Our RSM US Supply Chain Index rose by a sharp 10% in April to 2.51 standard deviation below neutral, the best result since February 2021. March’s reading was revised downwardly to 2.81 below neutral.
The sharp recovery was driven by strong inventory replenishment, improved production capacity utilization and a marked decline in the job vacancy rate.
These improvements outweighed the longer delivery times and heavier freight traffic on the month, which are the other subcomponents of the index.
There are reasons to expect upside surprises to the outlook on supply chain bottlenecks. Businesses, learning from last year, have become a lot more prepared. According to our proprietary survey of middle market firms, about 70% of companies negatively affected by upstream supply disruptions found other sources of supply in the United States from April 2021 to April 2022, while 36% found new sources outside of the United States. Many firms have also turned to more in-house production and less reliance on upstream suppliers.
The takeaway
But that does not mean prices will automatically ease as supply chain issues unwind. Reshoring and in-house production, while solving inventory problems, will keep prices higher, complicating the inflation picture. That will be the crucial trade-off that firms will have to figure out.
