The Signal May 14, 2024

The Fed Keeps Cool as Supply Chain Trends Restrain Inflation 

The Fed can thank changes in supply chain technology and dynamics for keeping prices from spiraling. But those megatrends are also raising the bar for supply chain leaders.

Kevin O'Marah Avatar
Kevin O'Marah

Federal Reserve Chairman Jerome Powell recently dismissed the idea that the US economy was headed back to 1970s style stagflation, saying “I don’t see the stag or the -flation.” He’s right. 

The underlying mechanics of inflation boil down to demand and supply, which, during Covid, were severely out of balance. Consumers were awash in cash from emergency fiscal stimulus while crashing global production and logistics capacity, and big swings away from some things (restaurant meals) and toward others (home exercise equipment) created a recipe for monetary disaster. 

That’s largely fixed now, thanks to high interest rates as well as big changes in supply chain technology and dynamics. 

Three New Supply Chain Realities That Work Against Inflation 

With stability back in the mechanics of supply chains, we’re seeing megatrends in supply chain management that will make Powell’s job easier. These include: 

1. Robotics and Automation Dampen Wage Pressure 

Labor costs have risen fast since Covid, and the wage ratchet effect is keeping them high. At the same time, though, automation is experiencing a ChatGPT moment. Technology advancement is so fast, and the flexibility of robotics, machine vision, and AI is so great that most industries are preparing to eliminate thousands of jobs.  

UPS, Ford, and Amazon are all visibly part of this trend. Upward pressure on wages will be held in check going forward by companies’ ability to substitute capital for labor far more widely than would have been true even five years ago. Plus, it looks like this trend is gaining momentum. 

2. China Exports Deflation Forcing Brands to Cut Prices 

China’s factory-to-the-world days may be ending with global companies diversifying into India, Vietnam, and Mexico, but the capacity is still there. Meanwhile, China’s demographics are dampening domestic consumer demand enough that the Communist Party of China has little choice but to keep producing for export.  

Political trade wars aside, China’s manufacturing muscle looks likely to keep a lid on prices for everything from Shein’s apparel to IKEA’s furniture. US retail brands are aggressively cutting prices wherever possible to draw shoppers who have started pulling back specifically because they feel prices are too high. Inflationary expectations are key to the Fed’s battle, and retailers are suddenly an ally.

3. Resilience Is Now Religion 

The phrase “supply chain crisis” lodged itself in the post-Covid public consciousness when everyone from supermarkets to plumbers blamed supply chains for shortages, delays, and crazy high prices. Since then, we’ve seen a series of shocking events – the type that headlines warned would “snarl” supply chains – including the Ukraine war, the Red Sea attacks, the Panama Canal drought, and the Baltimore bridge collapse. None of these have proven to be disastrous or even broadly problematic.  

The new news is simply that supply chain managers have added visibility tools, scenario plans, and risk management protocols that were never truly necessary before. They are working, which means disruptions are a lot less disruptive now. 

Implications for Supply Chain Leaders  

This is all good news for Powell and the Fed. For supply chain leaders, however, it raises the bar on what must be done for customers and investors. 

  • Do Not Expect Price Increases to Save Margins: Plan on annual operating expense cuts of 5% or more for the foreseeable future. Passing along costs to customers worked for a while, but that’s over now. One CSCO I spoke to recently described her mandate as “doubling annual productivity gains” on labor, assets, and materials.  
  • Think Big about Automation: Robots can replace workers in some jobs, but robotic systems that redesign entire processes can increase labor productivity by multiples rather than fractions. It’s not just about costs, either. It’s about preserving the ability to navigate a talent landscape that will get more expensive and rigid as organized labor flexes its new sense of power.  
  • Stay Friendly with China: De-risking China-heavy sourcing strategies was the top move of 2023. Now, it’s just as important to keep all options open. Decoupling entirely was never realistic, and existing Chinese partners will be more ready to negotiate now that competition from India and others is heating up.  

Supply chain is the Fed’s secret weapon. You’re welcome, Mr Powell.