It has been a week since the Dali, a container ship, struck the Francis Scott Key Bridge in Baltimore. It’s still stuck there, and the images remain amazing, in part because the vessel is so huge compared with what’s left of the bridge. How could planners not have realized that operating superships in the harbor’s confined waters posed a risk?
And with the ship and pieces of the bridge blocking the harbor entry, the Port of Baltimore remains closed. How big a deal is that for the economy?
Well, it would have been quite a big deal if it had happened in late 2021 or early 2022, when global supply chains were under a lot of pressure. Remember when all those ships were steaming back and forth in front of Los Angeles, waiting for a berth?
It’s less important now: Pre-Dali Baltimore was only the 17th busiest U.S. port, and there’s apparently enough spare capacity that most of the cargoes that would normally have passed through Baltimore can be diverted to other East Coast ports. The Dali is no Ever Given, the ship that blocked the Suez Canal when it ran aground in 2021.
Still, global supply chains don’t have as much slack as they did, say, last summer, after pandemic disruptions were mostly a thing of the past, because Baltimore isn’t the only problem. The Panama Canal is operating at reduced capacity because a historic drought, probably in part a consequence of climate change, has limited the supply of water to fill the canal’s locks.
Elsewhere, the Houthis have been firing missiles at ships entering or leaving the Red Sea, that is, heading to or from the Suez Canal. Presumably as a result of these and other problems, the New York Fed’s widely cited index of global supply chain pressure, while still not flashing the red lights it was showing in the winter of 2021-22, has worsened significantly since last August.
And given what we know about the causes of the inflation surge of 2021-22, this worsening makes me a bit nervous.
Inflation’s rise and fall
I think it’s fair to say that a great majority of economists were caught flat-footed one way or another by inflation developments over the past three years. Along with many others, I failed to predict the big initial run-up in inflation. But even most economists who got that part right appear in retrospect to have been right for the wrong reasons, because they failed to anticipate the “immaculate disinflation” of 2023: Inflation plunged, even though there was no recession, and the high unemployment some claimed would be necessary to get inflation down never materialized.
A side remark: Official measures of inflation were somewhat hot in the first two months of 2024. But much of this probably reflects the so-called January effect (which is actually spread out over January and February), in which many companies raise prices with the coming of a new year. The Federal Reserve and many independent economists expect disinflation to resume in the months ahead.
So what explains the swift rise and fall of inflation? Way back in July 2021, White House economists argued that we were in a situation resembling the surge in inflation that began in 1946 — that recovery from COVID had created conditions similar to the early postwar period of pent-up demand and disrupted supply chains. The postwar inflation surge ended relatively quickly — after two years — without an extended period of high unemployment.
In retrospect, that analysis looks spot on, since pretty much the same thing seems to have happened in the latest inflation cycle.
A recent White House analysis includes the effects of supply-chain pressure, using the New York Fed measure. According to this model, supply chain pressures (plus the interaction of these pressures with demand) accounted for most of the rise in inflation above the Fed’s 2% target during the past several years.
Conversely, the model says that the easing of supply chain problems as businesses adapted to economic change accounts for most of the disinflation since 2022.
Supply chain worries
This all makes a lot of sense, and until recently made me feel rather comfortable about the prospects for a soft landing — inflation falling to an acceptable level with unemployment staying low.
But if you think supply chain disruptions were the main driver of inflation and the easing of these disruptions the main driver of disinflation, you have to be worried about the effects of a renewed worsening of the supply chain situation.
Now, supply chain problems today aren’t remotely as bad as they were in 2021-22; if the Dali disaster had occurred back then, it really would have been a collapsed bridge too far. At least according to the New York Fed measure, we’ve actually been experiencing a stretch of below-normal supply pressure, and all that has happened is a return to normal. This might not have much adverse effect on inflation.
But I’m not as sure about this as I’d like. Supply chains are making me nervous again.
Paul Krugman is a New York Times columnist.