Thread by @HyunSongShin

The inflation surge has brought #bottlenecks under the spotlight

Today's #BIS_Bulletin takes a closer look at what's going on and what we might encounter going forward

A short thread follows
bis.org/publ/bisbull48…

Bottlenecks started out as disruptions to supply, but they have morphed into something more

Key point to bear in mind: in aggregate at least, supply has caught up to pre-pandemic levels in key sectors like semi-conductors as well as in raw materials and shipping

So, what then is going on?

Two factors are key: (1) shift in composition of demand and (2) the endogenous changes in behaviour that's given rise to bullwhip effects

Let me takes these in turn

First, the composition of demand

There's been a marked shift toward manufactured goods and away from services

This shift toward manufactured goods shows up clearly in the "upstreamness" measures derived from input-output matrices

These are the sectors that have the biggest international spillovers

The second important element is the endogenous changes in behaviour along the supply chain

It is rational (prudent, event) to react to shortages by ordering more, ordering earlier and to hoard inputs

But this kind of reaction is self-defeating in the aggregate

This phenomenon is sometimes known as the "bullwhip effect" in operations management

en.wikipedia.org/wiki/Bullwhip_…

Thomas Schelling's 1978 classic "Micromotives and macrobehavior" is all about the paradoxes that arise when prudent and rational behaviour at the individual level could nevertheless be self-defeating in the aggregate

The price of lumber this year illustrates well how the current bottlenecks is not simply a uniform squeeze everywhere; there are whipsaw effects along the supply chain

Incidentally, @tracyalloway and @TheStalwart have done a great job of highlighting the strangeness of it all

bloomberg.com/oddlots-podcast

To the extent that bullwhip effects are the prime drivers of #bottlenecks rather than fundamentals, things could change for the better - and rather quickly

Shortages could turn into localised gluts, as we have seen in some commodities, but these will eventually smooth themselves out

Investments directed toward pinch-points will be key

Secondly, as economists who study multiple equilibrium models know well, the shifts in the equilibrium can come about rather swiftly even for small changes in the underlying fundamentals

So, just as #bottlenecks have lasted longer than expected, it is possible that their resolution follows more swiftly than is currently feared

But there is something of a race against time

So far, there is little sign of a broader wage-price spiral, but once the spiral takes off, bringing inflation under control will be a much tougher task

Fixing broken thread:

https://twitter.com/HyunSongShin/status/1458787040607326208?s=20