The supply chain is healing — but new signals hint inflation will stay high throughout 2022

• The US is probably past the worst of the supply-chain crisis, but full recovery is a long way away.
• "It's just that things aren't getting as bad as quickly as they were," an economist told Insider.

The US is likely past the worst of its supply-chain nightmare. But recent improvements haven't been enough to cool inflation, and the latest data suggests prices will keep soaring for the rest of the year.

The country's inflation problem is a two-pronged issue. The shipping delays and port bottlenecks of late 2021 left businesses with insufficient supply. At the same time, Americans unleashed pent-up demand throughout last year and pushed spending above the pre-pandemic trend. Too many dollars were chasing too few goods, and firms looking to protect their profits were pushed to raise their prices.

One of those prongs is slowly improving. Various indicators of supply-chain pressure, from container shipping rates to delivery times, have eased in recent months. Jefferies forecast in mid-October that the US was "past peak pinch," and JPMorgan shared a similarly optimistic outlook last month, saying the shipping pressures were "easing in all the right places."

But other factors suggest those forecasts might be a tad optimistic. The situation might be easing, but it hasn't been enough yet to cool the consumer-price rally. With demand running stronger than anticipated, it's looking increasingly likely that prices will charge higher through the rest of the year.

The most recent data upholds this and suggests the highest inflation in four decades isn't going away. The producer price index, which instead tracks businesses' input costs, soared 1% last month, doubling the median forecast and marking the biggest jump since May. Rising input costs tend to precede higher prices as businesses are pressured to maintain their margins.

Part of the problem is just how widespread inflation has become, Bruce Kasman, JPMorgan's chief economist, said Thursday. The bank expected price growth to "extend beyond the narrow set of items directly linked to supply bottlenecks," he said. Yet the "intensity of the acceleration" in price growth throughout the index was "surprising," Kasman added. Inflation is no longer a temporary symptom of reopening; it's morphed into a much more sweeping issue.

The US is past the supply-chain crisis peak but still far from recovered

It doesn't help that the supply-chain crisis is still looming large over the recovery. The situation is improving, but measures like delay times and shipping prices are still far worse than they were before the pandemic, Alex Lin, a senior US economist at Bank of America, told Insider on Thursday. The US might be past the peak, but the path down the mountain has so far been a slow and arduous one.

"We haven't really seen any true improvement. Things aren't going through the supply chain faster," Lin said. "It's just that things aren't getting as bad as quickly as they were."

The other half of the inflation problem is also proving more stubborn than expected. Stronger-than-expected demand lifted retail sales by 3.8% last month, nearly doubling the average forecast for a 2% gain. That marked the largest one-month jump since stimulus checks were last sent out in March. Despite the bleakest economic mood in a decade and sky-high inflation, Americans are still spending big.

To be sure, retail sales are measured in nominal dollars, meaning higher prices played some part in the increase. The measure also largely tracks spending on goods, which has ballooned through the pandemic, while service spending has been far weaker.

Yet with the supply chain still in a complicated tangle, demand is what will have to give for inflation to edge lower, Lin said.

"A lot of the normalization does have to come from demand pulling back and from goods spending cooling off," Lin added.

Inflation will likely be a 2021, 2022, and 2023 story

Some help is on the way. The Federal Reserve is very likely to raise interest rates in March, kicking off its long process of removing economic support and fighting inflation. Interest-rate hikes reverberate throughout the economy, as they lead to higher rates on everything from car loans to credit-card payments.

As such, the Fed's action could ease demand in the right places. Higher rates are likely to curb demand for large purchases like cars and homes. Cutting demand for the latter would have knock-on effects for other items like furniture, appliances, and commodities like lumber and steel, Lin said. The effects won't be immediate, but pulling demand lower is the first step to reaching healthier inflation levels, he added.

Overall, Lin's inflation forecast is similar to his outlook toward the supply problem: It's improving but not as fast as hoped. Bank of America revised its year-end projection for core personal-consumption expenditures — another popular inflation measure that strips out food and energy prices — last week to 4.3% from 4%. That's still well above the Fed's 2% target and the average price growth seen before the pandemic. The bank expects inflation to stay "fairly elevated" through 2023 as well, Lin said.

The situation is improving, but Americans are set to feel the heat for many more months.