Page 14 - ISQ UK_October 2017

INVESTMENT STRATEGY QUARTERLY

Supply Pressures Have Stoked Inflation

Supply chain pressures have had a direct impact on inflation. While still elevated, the recent downturn in
the Backlog of Orders Index suggests suppliers are starting to catch up with demand. As suppliers
continue to work through the imbalance, price pressures should start to fade.
5.5 75

5.0 70
4.5
65
4.0 60
Core CPI (%) 3.5 55 ISM Mfg Backlog of Orders (3M Moving Avg.)

3.0
2.5 50

2.0 45
1.5 40
1.0 35
'12 '13 '14 '15 '16 '17 '18 '19 '20 '21
Core CPI (% YOY) ISM Manufacturing Backlog of Orders (3M Moving Average)

Source: FactSet, as of 12/17/2021
backlog of orders suggests that companies are sourcing what brakes too hard if supply chain bottlenecks continue to ease and
they need to fulfil orders. With companies catching up on the inflation pressures recede. This would be good news for risk
orders as the supply chain normalises, this should put further assets, as the macro underpinnings of above-average economic
downward pressure on pockets of inflation that have driven growth and a still solid earnings outlook are likely to remain sup-
headline inflation numbers higher. portive.
While it is difficult to forecast when the supply chain will fully nor-
malise, the recent developments we’ve flagged are encouraging KEY TAKEAWAYS:
signs. With new capacity being added across the supply chain, • While the major ports have a long way to go to reach
cargo spending shifting from sea to air, and a ton of goods still pre-pandemic levels of efficiency, they are making
waiting to come onshore, it is highly likely that the inflationary considerable progress working through the current
environment we’re grappling with today is setting up to bring sig- logistical issues.
nificant disinflationary pressures later in 2022 or early 2023.
• With companies catching up on orders as the supply
WHAT IMPLICATIONS DOES THIS chain normalises, this should put further downward
HAVE FOR INFLATION? pressure on the pockets of inflation that have driven
The stresses in the supply chain have not derailed growth, but headline inflation numbers higher.
they have added a lot to inflation over the last year. The longer • While the Fed is expected to shift to a less accommo-
this exists, the more concerned policymakers get about inflation dative policy stance in 2022, policymakers should
expectations becoming unanchored. With inflation now running not have to tap on the brakes too hard if supply
at uncomfortably high levels, it is prudent for policymakers to be chain bottlenecks continue to ease and inflation
concerned. Hence, Chairman Jerome Powell’s recent hawkish pressures recede.
pivot. While the Fed is expected to shift to a less accommodative
policy stance in 2022, policymakers should not have to tap on the

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