The COVID-19 inflation aftermath
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
Menu costs mean many companies delay raising prices until the start of a new calendar
year. When inflation is stable—as it was pre-COVID—seasonal adjustment filters out these start-
of-year price resets, which makes seasonally adjusted data a good gauge for inflation
momentum. The COVID inflation spike ended that. Start-of-year price resets were larger than
normal due to the higher level of overall inflation. Standard seasonal adjustment failed to filter
these start-of-year resets out, making inflation in early 2023 and early 2024 look worse than it
really was. These start-of-year price resets are concentrated in services, as our “core” services
measure that excludes owners’ equivalent rent, health care, and transportation clearly shows
consistent with the idea that menu costs keep many small businesses from adjusting prices until
the start of a new calendar year.
While residual seasonality is an important phenomenon, it is also true that this dynamic has
—for now—run its course. Our inflation generalization index, which measures the combined
weight of all items in the CPI (consumer price index) with month-over-month inflation above
2%, fell to 62% in June 2024 (Figure 3), meaning it is almost back to its pre-COVID average of
60%. The case for continued disinflation therefore likely lies elsewhere and—we think—the
severity of COVID supply disruptions suggests lagged effects of supply chain normalization will
still play an important role. The global PMI database by S&P Global provides balance of opinion
data on delivery times across countries. We transform these data into Z-scores for better
comparability. Figure 4 shows that delivery times in the U.S. in the aftermath of COVID-19 were
on par with what Japan experienced after the Fukushima nuclear disaster in 2011, only that Japan
managed to fix its supply chains quickly, while delivery times in the U.S. remained stretched for
over a year.
The severity—and length—of COVID supply disruptions holds the key to potential further
disinflation, even with supply chains having normalized back in 2022. Bare shelves during the
COVID-19 pandemic may have made inventory managers more conservative. That more
conservative approach to inventories, in turn, could have generated a wider gap between output
prices (where higher prices diminish end demand and therefore boost inventories) and input
prices. Figure 5 shows output prices from the global PMIs, which are the prices firms charge
customers. Figure 6 shows input prices, which are the prices firms pay suppliers. Output prices
rose significantly more than input prices, i.e., firms hiked margins, potentially as a mechanism to
better conserve inventory as they grappled with a shock as large and disruptive as the COVID-19
pandemic. (Note that this potential driver of COVID-era margin expansion is distinct from and
potentially more plausible than “greedflation.”) Figure 5. Z-scores for manufacturing PMI output
prices in the US, eurozone, and global median across 34 countries
This channel of price inflation is diminishing, however. Despite ongoing geopolitical
concerns and some increase in shipping costs recently, salient geopolitical tensions and shipping
disruptions in the Panama and Suez canals over the past two years have generally eased relative
to their peaks. The implication is that conservative inventory management may also ease further,
bringing elevated margins via this effect from COVID-19 down over time.
Lagged effects from supply chain normalization
Figures 7 and 8 compare global PMI delivery times and our proxy for company markups,
which we construct as the difference between the Z-scores for output and input prices. While
delivery times in the U.S. had fully normalized by Q4 2022, markups only began to fall around
one year later and—on some metrics—have yet to fully normalize. This is consistent with our
adaptive expectations view on how inventory managers reacted to the COVID shock and
subsequent news. Normalizing margins could be one possible driver of continued disinflation,
even now that residual seasonality has largely played out for 2024. We will examine lagged
effects from supply chain normalization in future posts.
