Supply chain crisis temporary says BoE’s Tenreyro

A leading member of the Bank of England’s Monetary Policy Committee has said the global supply crisis is likely to be temporary and that the UK may have bigger issues in the medium term.

Silvana Tenreyro, external member of the Monetary Policy Committee was speaking on an online seminar hosted by the Centre for Economic Policy Research where she explored the issues with the global supply chain in the wake of the COVID-19 pandemic.

She said recent disruption to global supply chains had arisen because of an unprecedented combination of a strong rotation in global demand towards some sectors – mostly goods, and away from others, mostly services – and a variety of reductions in supply, particularly affecting a few critical inputs.

“The rotation in demand reflects changes in consumption patterns brought on by the pandemic, which made some types of consumption less desirable, given the associated health risks,” said Tenreyro. “It has also been influenced by the large fiscal programs in place in a number of economies. Many of the reductions in supply have also been Covid-related, with lockdowns taking place across the world, while several other disruptions have been idiosyncratic.”

She recognised  the UK, the economy has not yet recovered to the employment and output trends we would have seen without the pandemic.

“At the same time, a range of temporary factors have been pushing CPI inflation above target and will continue to do so over the coming months,” Tenreyro explained. “Some of these, such as base effects and the direct impact of energy price rises, are short-lived, and monetary policy can do little to offset them: much of the effect of policy would not come until after their impact had faded; more important will be any indirect effects of energy prices on real incomes or production costs.

“The effects of supply chain disruption should also be temporary, and unwind as supply of some goods increases, and as demand rotates back towards pre-Covid consumption patterns.

“The speed of this rotation is a key uncertainty and will be related to the evolution of the pandemic around the world. In the UK, domestic cost pressures will depend on the evolution of the labour market now that the furlough scheme has ended.

With global supply chains dominating the news agenda Tenreyro said it has increased public awareness of their working and their importance.

“Just as the global financial crisis brought the financial system to the attention of the general public (as well as many economists), so too has the pandemic moved the workings of modern supply chains from the background to the front page,” she explained. “But while the focus on these complex production networks is new, many of the debates hark back to some of the oldest questions in economics: the benefits and potential costs of international trade.

“International trade affects the daily lives of almost everyone in the world. In the UK, with around one-third of the consumer price index basket consisting of imported goods and services, our typical supermarket basket would look very different without it. Trade brings many benefits.”

She concluded: “The current supply chain disruption will ultimately be temporary. For some products, disruption and its effect on inflation are likely to dissipate quickly as firms find new suppliers or current ones are able to expand.

“For others, where supply is slower to adjust, the rotation of demand from goods back towards services should help ease pressure on supply chains. In either case, responding to short-lived effects on inflation would only be likely to impart additional volatility.

“While my expectation is that the effects of supply chain disruption will be short-lived, a non-negligible risk is that the switch from goods back towards services is more protracted, leading to a longer period of supply disruption and inflationary pressure.

“Given the close relationship between the composition of output and Covid risks and restrictions, it is likely that the epidemiology of the pandemic across the globe will be crucial in determining whether this risk crystallises. The other major uncertainty for the UK inflation outlook at present is the evolution of the labour market, where there are two-sided risks.

“Given the near-term outlook for headline inflation, there is a possibility that higher inflation or higher inflation expectations begin to feed through into higher wage demands. The effects of inflation expectations on wage bargaining can be difficult to gauge, so I will be paying particular attention to direct indicators of wage pressures, including our best assessment of underlying wage growth, settlements data, and information from the Bank’s Agency network.

“The opposing risk is that the end of the furlough scheme in September leads to a loosening in the labour market and a moderation in wage pressures. A large number of workers need to be reabsorbed into the labour market over the coming months, some of whom will flow into unemployment.

“The literature on unemployment benefits, which are comparable in effect to the furlough scheme, would suggest that furlough has been boosting underlying wage growth. Its withdrawal could put this process into reverse.”

“Just as the global financial crisis brought the financial system to the attention of the general public (as well as many economists), so too has the pandemic moved the workings of modern supply chains from the background to the front page.”

Silvana Tenreyro, Bank of England

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