How China’s Struggles Could Impact Inflation, U.S. Supply Chain

China’s covid-related lockdown and severe restrictions in Shanghai and other parts of the country have affected millions of workers and could impact the U.S. supply chain, exacerbating already runaway inflation.

China’s zero-covid policy, which imposed strict measures in the last two years to keep the disease out of the country while the rest of the world reported cycles of surging cases and deaths, has failed to contain the recent outbreak.

Tougher lockdown measures put in place by authorities to slow the outbreak are creating a massive supply chain disruption that’s hurting the world’s entire manufacturing capacity.

China is the third largest manufacturing nation in the world and most countries, including the U.S., rely on it for smartphones, semiconductor chips, computers and other tech products.

On April 5, Chinese authorities extended their lockdown of Shanghai to cover all 26 million residents after a fresh surge in covid cases. Shanghai is the largest single city to be locked down to date.

China’s covid restrictions on manufacturing and shipping threaten supply chains that are still struggling to return to pre-pandemic performance. Prices are expected to rise as product supplies temporarily dry up.

There are growing signs that China’s economy is slowing sharply because of the lockdowns. China’s services sector activity contracted in March at the steepest pace in two years as peoples’ mobility was restricted. The Chinese Caixin purchasing managers’ index (PMI) fell from 50.2 in February to 42 in March. A dip below the 50-point mark separates growth from contraction.

The China lockdown disruption further complicates the U.S. Federal Reserve’s fight against inflation, as it plans to continue raising interest rates in April after approving its first rate hike in March.

The war in Ukraine is already causing a spike in inflation globally due to a slowdown in global supply chains, causing prices to rise in the supermarket and at the fuel pump.

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The Fed was initially dismissive of inflation, expecting pent-up consumer demand to eventually die down after covid restrictions were lifted, and inflation to stay within a set framework. When inflation rose more than expected, the Fed became hawkish and started inching up interest rates.

China’s response to its worst covid-19 outbreak in two years has complicated things for monetary policymakers in the U.S., who have already spooked investors with an earlier-than-expected rate hike.

Inflation in the U.S. is up 7.9 percent in the last year through February — the fastest increase in decades.

Photo: A delivery man selects items from partially empty shelves in Shanghai, China, March 30, 2022. As millions of Shanghai residents line up for coronavirus tests in the closed-down metropolis, authorities are promising tax cuts for shopkeepers and to keep its busy port functioning to limit disruptions to industry and trade. (AP Photo/Chen Si)

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