Global Supply Chain Pressure, Uncertainty, and Prices

This paper examines the impact of global supply chain disruptions and the associated uncertainty on economic activity and inflation. We employ a Bayesian VAR model with the Global Supply Chain Pressure Index (GSCPI) and estimated uncertainty to analyze their effects during the pandemic. Our results reveal that an increase in GSCPI, representing a negative supply-side shock, triggers a significant and prolonged decline in employment and production coupled with rising inflation. Heightened uncertainty, acting as a demand-side shock, reduces economic activity and inflation. However, unlike a typical uncertainty shock, it significantly drives up inflation in the long run. Our study also demonstrates the heterogeneous responses of sectoral prices - including services, durable goods, and non-durable goods - and the Producer Price Index (PPI). Lastly, we show that shocks to the GSCPI and the associated uncertainty play a crucial role in explaining the recent surge in inflation.