Supply chain disruptions and inflation became synonymous in the aftermath of the pandemic economy. We are also currently seeing some severe strains in certain supply chains. However, they are not as general as they were post-COVID and are unlikely to accelerate inflation in the same magnitude as was the case in 2022 and 2023.
Excluding food and energy, the Consumer Price Index accelerated from 2.3% in 2019 and 1.6% in 2020 to 5.5% in 2021 and 5.7% in 2022. It was the worst inflationary outbreak since the early 1980s, reflecting the broad disruptions in supply chains and changes in spending patterns. This included preferences about where to live, with the scrambling of migration patterns causing house prices and rents to surge in certain parts of the country. The Russian invasion of Ukraine in February 2022 produced additional inflationary pressures via energy and grain prices.
Since 2022, core inflation—the CPI excluding food and energy—has decelerated to the 2.5% to 3.0% range for most of the past two years. It will probably remain in that range or rise only slightly in the remaining months of 2026.
There are several reasons for the more muted inflationary impact. COVID caused factories to shut down across multiple continents. China continued to pursue a zero-COVID policy long after many other countries relaxed restrictions. Its integral role in global supply chains ensured that the inflationary impact lasted a long time. Many of its ports remained at least partially closed for an extended period. Trade patterns changed in surprising ways, with shipping containers in short supply across many trade routes. There were extreme fluctuations in inventories of key products. In particular, semiconductor shortages persisted for years, affecting the supply of autos and many other manufactured goods.
Fragmented impact on the world economy
In contrast, the supply chain disruptions of 2026 are more fragmented, affecting energy supplies and fertilizers. The world economy is not experiencing the global disruptions of supply chains and logistical breakdowns seen during the pandemic.
The pandemic also caused sharp and unpredictable changes in patterns of consumer demand, including housing locations. This, too, contributed to inflation, but this particular source of inflationary pressure is not present in 2026. However, the current economic environment does feature a particular source of inflationary pressure in the form of the AI boom. High-end chips are constrained in the sense that producers will not be able to fulfill new orders until next year or beyond. The same can be said of advanced packaging and high-bandwidth memory. The demand for investment in AI is so intense that even garden-variety CPUs and DRAMs are experiencing price pressures and lags in fulfilling orders.
COVID produced an intense and widespread (but relatively short-lived) disruption to a stable global system of supply chains. The disruptions to shipping across the Strait of Hormuz and from the AI revolution could be more persistent and structural in nature. The shortages from the AI revolution could gather force over time. However, the AI revolution is also likely to produce productivity growth that reduces inflation. How these disparate effects play out over time is highly uncertain.
For 2026, a COVID-type rise in inflation is unlikely. But there are some risks to the 2027 outlook. The shortages caused by geopolitical events in the Middle East and the AI revolution will persist into 2027 and beyond. They might even intensify. The longer they continue, the greater the risk that inflation will spread across many manufactured consumer goods. Services inflation could also be affected.
There is even some interplay between the two forces. For example, the Persian Gulf region is a key supplier of helium, which is needed to manufacture and cool the chips used in data centers. Disruptions to the supply of helium and other commodities that are important for the supply and operation of such equipment could compound inflationary pressures.
Working in the other direction is the likelihood that ongoing disruptions to shipping through the Strait of Hormuz will have a negative effect on the global economy that will become larger with time. Growth in the United States has been resilient so far. But it might not remain so in coming months.
