A New Supply Chain Pressure Index

Key Takeaways

• The Federal Reserve launched a new supply chain pressure index.
• The index takes into account shipping rates, such as the Baltic Dry Index, country-level manufacturing data from the Purchasing Managers Index (PMI), and then excludes new orders to avoid supply-side hiccups
• While data shows economic pressures at extreme levels, they could be easing.

Supply chain issues continue to plague our ports.

But the Fed says things might be getting better.

Supply Chain Pressure Index

In an effort to measure the impact of supply chain disruptions, the Federal Reserve created a new Supply Chain Pressure Index.

This metric takes into account two major components:

• Cross border transport costs, such as the Baltic Dry Index which captures ocean freight raw material shipment costs, the Harpex which tracks container shipping rates, and international air and trucking rates from the Bureau of Labor Statistics.

• Country-level Purchasing Managers’ Index surveys that account for delivery delays to manufacturers and the size of backlogs in key economies.

The Fed then attempts to control for supply-side hiccups on the PMI data by removing new orders, which are seen as a gauge for demand.

The graphs above show that although current problems are worse than recent history by a wide margin, they appear to be topping out.

Really?

Actually yes.

Basic math says that we’re about to lap many of the increases, which means we judge inflation against a higher baseline.

That doesn’t mean we can’t hit 3% or more. But makes +5% unlikely.

Plus, we’ve started to see some food costs come down.

And the removal of steel and aluminum tariffs on Eastern Europe that kicked in Jan. 1st should help.

However, the infamous Port of LA backlog has yet to clear. Current stats put the vessel count at 126.

Additionally, many companies planned to implement price increases at the start of the year on everything from mustard to motorcars.

The Bottom Line: While inflation isn’t likely to continue to accelerate, it remains a real problem.

Price increases will still take the better part of the year before they make their way to consumers.

However, we expect consumer goods companies like Kraft-Heinz (KHC), Clorox (CLX), and the like to benefit from those same price increases as well as market rotation into ‘safer’ stocks.

• 10 Safe Dividend Stocks with High Yields
• December Employment Preview
• What Warren Buffett taught us about Digital Moats