Why Supply Chains Explain Prices

The price is the last step

A price on a shelf looks like one number. It is the end of a long chain of making, shipping, waiting and selling. When any step slows down or costs more, that cost has to go somewhere, and often it ends up in the price.

We think the most useful habit in reading prices is to ask what happened upstream before asking why the number moved.

What a public measure of pressure looks like

In May 2022, researchers at the Federal Reserve Bank of New York introduced the Global Supply Chain Pressure Index. It was designed to capture supply chain disruptions using a range of indicators. It combines global transportation costs, including ocean shipping and airfreight, with delivery times, backlogs and purchased stocks drawn from manufacturing surveys in seven economies. The authors also strip out demand effects from the underlying series, so the index is meant to reflect supply conditions rather than simply strong sales.

We value this kind of method because it is open to inspection, and because it shows its limits. A reader can disagree with it for stated reasons, which is the point of publishing a method at all. The inputs are named, the authors are named, and anyone can read the paper.

What the evidence says about inflation

The same researchers tested how well the index explains inflation. They found that recent inflationary pressures were closely related to its behavior, especially for producer prices in the United States and the euro area. They also found that responses were substantially smaller for consumer prices than for producer prices. The index itself peaked at above four standard deviations in November 2021.

Three cautions apply. This is one study of one period, and a statistical link is not proof of cause in every case. The authors also report that oil price shocks mattered, so supply chains were not the only driver. And an index is a summary, so it cannot tell us what happened to any single product. We do not know how well these results carry over to other periods.

Why we care

Supply conditions explain part of what prices do, not all of it. Anyone whose decisions depend on cost, whether a clinic choosing a supplier or a founder choosing a manufacturer, benefits from looking at the chain behind the price. Asking why before asking what is the reason Leopard Intel exists, and it is designed to serve outside customers as well as the portfolio. We treat the portfolio as a worked example, not the limit.

If you find an error in the sources above, tell us and we will correct it.