Supply chain stress climbed sharply in April, according to data published by the Federal Reserve Bank of New York on Wednesday. The bank's Global Supply Chain Pressures Index rose to 1.82 in April from 0.68 in March, marking the biggest single-month increase since March 2020 when the COVID-19 pandemic significantly disrupted global commerce.
The April reading approaches the index level seen in July 2022, when the gauge registered 1.86. New York Fed officials and market observers attribute the recent jump largely to trade interruptions stemming from the conflict that began with President Donald Trump's attack on Iran.
That confrontation has had immediate effects on maritime traffic in a vital chokepoint. Trade moving through the Strait of Hormuz has been reduced to a virtual standstill, and the curtailment of shipments has coincided with a rise in energy prices. According to the New York Fed's release, there is no resolution in place that would restore normal trade flows through the region.
New York Fed President John Williams commented on the data on Monday, saying "notable" supply chain pressures have started to surface and that recent indicators "echoes the severe shortages and supply disruptions that the world economy experienced in 2021 as it emerged from the pandemic."
The interaction between supply disruptions and pandemic-era policy responses previously contributed to the highest inflation recorded in decades. That inflation has not returned to the Federal Reserve's 2% target, and current price readings are already showing additional upward pressure. The data point to stronger price dynamics driven in part by an import tax surge implemented by President Trump and by higher energy costs associated with the conflict.
Federal Reserve officials have adjusted their policy expectations in light of these developments. Officials are stepping away from earlier projections for a rate cut this year and increasingly anticipate keeping rates steady for an extended period, with a possibility of further tightening. On Wednesday the Federal Reserve left its benchmark overnight interest rate in the 3.50% - 3.75% range, citing rising inflation concerns related to the U.S.-Israeli war with Iran. Financial markets are pricing in an extended period of unchanged rates well into next year.
Economists at Evercore ISI project that underlying inflation as measured by the personal consumption expenditures index will sit just under 3% in the fourth quarter. In their assessment they attribute roughly 50 basis points of that outcome to tariffs, oil and supply chain disruptions, and an additional 20 basis points to cost effects tied to artificial intelligence, stating: "Roughly 50 basis points of that comes from tariffs, oil and supply chain disruptions, plus another 20 basis points from AI cost spillovers."
The sharp uptick in the New York Fed's supply-chain gauge underscores the renewed fragility of global trade corridors and the implications for prices and monetary policy. As trade through the Strait of Hormuz remains constrained and energy costs stay elevated, businesses, consumers and policymakers face heightened uncertainty about the pace of price stabilization and the timing of any shift in interest rate policy.
Key points
- Global Supply Chain Pressures Index climbed to 1.82 in April from 0.68 in March, the largest month-to-month increase since March 2020 and the highest since July 2022.
- The rise is linked to disruptions from the conflict that began with President Donald Trump's attack on Iran, which has restricted shipping through the Strait of Hormuz and lifted energy prices.
- Federal Reserve officials are moving away from expectations of rate cuts this year and are increasingly preparing for steady or higher rates as inflation pressures re-emerge.
Risks and uncertainties
- Prolonged disruption of Strait of Hormuz shipping could continue to pressure energy markets and logistics, affecting energy, shipping and manufacturing sectors.
- Persistent inflation above the Fed's 2% target may force monetary authorities to maintain higher interest rates longer than previously anticipated, affecting financial markets and interest-rate sensitive industries.
- Supply chain bottlenecks combined with tariffs and other cost factors could keep input prices elevated, creating uncertainty for corporate margins across goods-producing sectors.