Supply chain issues prompting inflation, potential interest rate spike. Here’s why

Since March 2020, the supply chain in the United States has been compromised in numerous ways — from a run on toilet paper and hand sanitizer, to lumber and labor shortages — and Americans have seen an increase in prices from goods to gasoline.

In a Jan. 26 statement, the Federal Reserve Board said while vaccinations and easing supply constraints are expected to help reduce inflation, potential new variants could still pose a risk to the economy.

According to meeting minutes from the Federal Open Market Committee’s meeting on Jan. 25 and 26, committee members agreed to keep the interest rate, currently sitting at 0.08 percent, but mentioned the possibility of an increase.

“With inflation well above 2 percent and a strong labor market, members expected that it would soon be appropriate to raise the target range for the federal funds rate,” according to the committee minutes.

What is causing inflation?

Harvey Rosenblum, Southern Methodist University economist, said three main factors are driving inflation: the COVID-19 virus, vaccine and velocity, meaning how fast people spend money when they get it. There’s also the curveball of unprecedented times, he said, which makes forecasting the economic future difficult.

“Anybody who can predict the outcome of an unprecedented event is a charlatan,” he said.

At the beginning of the pandemic, there was a demand for goods but often grocery store shelves were empty, which reduced spending. Not enough workers coming to work because of illness or layoffs caused supply to slow down even more.

What’s the current inflation rate?

As of January, inflation is at about 6-7%; Rosenblum said he suspects it will rise to 8-9% before it peaks because it will take a while before the supply chain is ramped up.

Rosenblum said economists had been worried before the pandemic about the effect an event like COVID-19 would have on the economy. Because it had not been an immediate threat, he said the fears weren’t addressed beforehand.

“The cost of being prepared for it is enormous and therefore people think about, ‘If it comes we’ll just muddle through,’ and it came and we’re doing our best to muddle through,” Rosenblum said.

Rosenblum, who served as the senior vice president of the Federal Reserve Bank of Dallas, said while there have been economic issues before, such as oil embargoes in the 1970s which tripled oil prices, he has never seen issues on this scale brought on by a virus in his lifetime.

Michael Carroll, University of North Texas professor and director of the Economics Research Group, said it’s hard to compare current economic events to the 1970s and 1980s because of how different both the economy and situation is today.

“It’s all pandemic related,” he said regarding today’s inflation. “We haven’t really seen anything quite like this.”

How long will supply chain issues last?

How long people should expect supply chain issues to last will depend on the state of the pandemic, Carroll said. If positive COVID-19 cases stay down after the omicron surge, the issues could get back to normal or at least stabilize by the end of this year or the beginning of next year.

The development and distribution of the COVID-19 vaccine has made efforts to “muddle through” better than predicted, Rosenblum said. Over 63% of the total United States population is fully vaccinated, including over 62% of Texans.

Going forward, Rosenblum said he expects some prices will go down and eventually manufacturers will ramp up supplies to help bring prices back down.

“Some prices will recede but we’ll still have probably a higher end price level, which has kind of been the trend of the past 60-70 years,” he said.