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Lower inflation good news: The Fed says supply chains are back to normal after three years of turmoil

Release Time:2023-03-07

The New York Fed, the Federal Reserve's regional Fed, delivered a piece of good news for the decline in high inflation: Global supply chains are finally returning to normal after three tumultuous years following the coronavirus outbreak.

The New York Fed's Global supply chain Stress Index came in at -0.26 in February, dipping into negative territory for the first time since August 2019. January's index was revised to 0.94. According to the New York Fed, February's index readings suggest a significant decline in supply chain stress, with the turn negative "suggesting that global supply chain conditions have normalized after a temporary setback around the turn of the year".

The Global Supply Chain Stress Index is the result of 27 variables compiled by the Federal Reserve Bank of New York, including the cost of transporting gay people across borders, as well as manufacturing data from China, Japan, South Korea, the United Kingdom and the United States. A zero reading represents a flat historical average, with positive or negative values marking the standard deviation above the average.

The index has fallen in seven of the last 10 months through February, reflecting reduced shipping congestion, easing parts shortages and weak consumer demand. Most factors contributed significantly to February's decline, the New York Fed said, with the biggest impact being the timing of deliveries in Europe.

Media commentary has said supply chain pressures have been a big contributor to high inflation in recent years. The February New York Fed index suggests it is easier and easier to move goods around the world, which could help reduce price pressures.

Ubs reported in February that the composite index of global supply chain stress it tracks has fallen below normal and, with the exception of one month in 2019, has fallen to its lowest level since 2013. In other words, supply chain stress is at its lowest level in a decade.

Ubs believes inflation may be nearing an inflection point as global supply chain bottlenecks are easing due to improved demand imbalances and lower airline and shipping costs.

But weak demand, another driver of the supply-chain slowdown, is bad news for countries. Amid the global economic slowdown, South Korea, known as the economic canary, has repeatedly flashed red lights.

Earlier this month, South Korea's Ministry of Trade, Industry and Energy announced that exports fell 7.5 percent in February from a year earlier, while imports rose 3.6 percent. Although the trade deficit narrowed to 5.3 billion dollars from a record high of 12.69 billion dollars in January, it has been 12 months in a row. It is the first time in 25 years that the trade deficit has been recorded for 12 consecutive months.

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