During the pandemic, Americans saw the costs associated with supply-chain disruptions, including shortages and inflation. The horrific collapse of Baltimore’s Francis Scott Key Bridge on Tuesday, after the bridge was hit by a large cargo ship, has cost six lives, it is currently presumed, and will surely wreak havoc on regional transportation. It is not likely, however, to cause problems on the scale of those we saw during the pandemic; the supply chain has become more resilient since then, and while Baltimore is an important port, others can pick up the slack until full service is restored. But the incident comes at an especially bad time in the fight to lower price levels and threatens to prolong our bout of 3-percent-plus inflation rates.
Transportation secretary Pete Buttigieg anticipates that the Baltimore tragedy will have a “major and protracted impact [on] supply chains.” The bridge’s crumbling has not only disrupted truckers’ routes, but has resulted in the partial closure of the Port of Baltimore, the nation’s 17th-largest port and an entry point to the American economy for many cars and construction materials. Fully restoring service to the port could take months, and building a new bridge could take longer still.
But since the bridge’s collapse affects only one port, albeit a big one, we won’t see pandemic-level backlogs, with goods being sent to ports in Norfolk and New Jersey. Cargo ships, however, will likely face longer wait times, which will increase shipping prices further amid ongoing disruptions from Houthis attacks in the Suez Canal.
In 2019, when inflation had been low, steady, and predictable for as long as anyone could remember, the average American consumer would probably not notice these disruptions. But these are different times. Inflation has trended down from its 8 percent high over the past year, leading markets and commentators to believe that the Fed’s rate hikes and normalization policies would shepherd rates to the central bank’s 2 percent target without inducing a recession. The last few months threw a small wrench in this story, though, as inflation has seemed to stall around 3 percent—a tolerable level, especially compared with the recent past, but still well higher than the Fed’s goal.
Some thought that the still-high inflation was seasonal, or a quirk of how rent gets measured, but wage inflation and elevated service costs suggest otherwise. Many economists hoped that goods disinflation could make up the difference and bring overall inflation back to 2 percent, but the bridge collapse and resulting port disruption cast doubt on that expectation. While the tragedy in Baltimore may not cause big price spikes, it makes goods disinflation less likely and could result in 3-percent-plus inflation rates sticking around even longer.
Even as the Port of Baltimore returns to full service, high prices may endure. Economists believe that inflation is largely a function of expectations. The Fed’s success in convincing markets that it had inflation under control was an important achievement, even if market expectations are less steady than they used to be. Unstable expectations are prone to be influenced by shocks. Another few months of 3 percent inflation, then, could change markets’ outlooks, resulting in persistently high inflation and the Fed’s further delaying of any interest rate cuts. Either way, the Baltimore bridge collapse comes at a fraught time for the American economy.
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