Supply-Driven Contributions to Inflation
You have heard it here many times that the current inflationary environment has been irritated by supply-related problems with ports, international manufacturing shutdowns, and global shipping as primary challenges. And indeed, these have been major factors in inventory management. For example, auto manufacturers are still hampered with ready access to necessary components. As shown in the LPL Chart of the Day, inflation surprised markets with an accelerated inflation print this week, although the more comprehensive metric of inflation, the Personal Consumption Expenditure (PCE) deflator may not be as hot. The PCE deflator for June will be published on July 29.
For the past year, supply-related problems contributed more to inflation than demand-related imbalances as shown in the gray box in the chart below. China’s zero-COVID policy was one of the biggest glitches in supply chains as metro areas and ports were shuttered by the Chinese government. However, things may be on the verge of changing. In May, the latest data point for the PCE, demand-driven contribution to inflation was slightly higher than the supply-driven contribution. This is an important development because the Fed’s monetary policy tools do not work on supply shocks but rather, only on demand.
Good News for the Federal Reserve
The good news is that inflation may become more demand-driven and less supply-driven. This is positive for policy makers because monetary policy tools are now more relevant than they were when inflation was primarily from supply bottlenecks. So as supply constraints ease and as Fed tools become more impactful, we could see the rate of inflation decelerating in the latter half of this year.
For more on the current environment, be sure to watch our latest Econ Market Minute, where LPL Financial Chief Economist Jeffrey Roach discusses more about the current state of affairs.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.
Tracking # 1-05302836