It has now been replaced by less volatile but far more pernicious service sector inflation.

In fact, there are two main reasons not to get too excited about the easing of global supply chain pressures. The first, and probably the most obvious, is that inflationary pressure has moved from being primarily goods-related to being service-related. The second is that the US dollar is still quite strong and US rates are still rising, which means that financing conditions for those utilizing global supply chains could still get much worse. On the first of these, it is clear to everyone that much of the volatility in global supply chains and goods prices has been washed out of the system. It has now been replaced by less volatile but far more pernicious service sector inflation.

Fed Chair Powell will presumably lay this out again when he talks to the Senate Banking Committee about his favorite measure of inflation at the moment; core service prices excluding rents. In contrast, the fact that goods price inflation might be becalmed due to easing supply chain pressure probably won’t merit much of a mention. And even if supply chain pressures and goods price inflation were to continue moderating, and help bring inflation back towards target, the likes of the Fed, ECB and more will still be wary about easing policy if service sector inflation remains elevated.

In short, central banks have moved on from worrying about supply constraints in the goods market to worrying about supply constraints in the labor market, for this has a bigger bearing on service sector inflation.

All of this is very familiar. But there’s another aspect of what’s happening at the moment that gives us reason to doubt that easing supply chain pressure is the nirvana that many investors in the markets – and central bankers – might anticipate. This relates to the financing of transactions that make up supply chain interactions. Put more simply, international firms might be relieved that supply chains are becoming unclogged, but if their access to financing the transactions needed to facilitate such trades is diminishing, the easing of supply chains will have limit ed benefit.

On this score, there have been a number of pieces written recently about the impact things like the value of the dollar can have on these financing conditions, the latest of which is a piece from the NY Fed. The argument here is that rising US interest rates lift the value of the dollar and tighten the price and/or availability of dollar credit that’s used to transact supply chain linkages. And this, in turn, relates to the fact that the dollar dominates globally when it comes to international financing. As such, the authors note an inverse relationship between the level of the dollar and global supply chain pressures.

Mr. Steve Barrow, Head of Standard Bank G10 Strategy, said if we accept this argument, it stands to reason that more Fed tightening and more dollar strength could harm supply chain financing and so restrict the benefit of the loosening that we have seen in these supply chains. However, while that’s the danger at the moment, as dollar strength may not be done yet, the longer-term outlook for lower US rates and a lower dollar suggests that the true benefits of supply chain easing will come in time. However, that may still only mean two cheers for lower inflationary pressure if service sector inflation remains elevated.