By Robin Brooks and Peter Orszag

The Fed last year hiked its policy rate aggressively, driven by fears it was falling behind the curve. Yet the lags with which various forces drive inflation are uncertain, so resulting tightening in US financial conditions may have been too rapid relative to the “true” pace of underlying inflation. We focus on one particular source of lags in the inflation process: lingering effects from supply chain disruptions at the height of COVID. We show that lagged supply chain effects are still an important driver of inflation in 2022, likely because price adjustments take time to filter into inflation. We estimate that the lingering impact of heightened COVID-era delivery times explains up to 70 percent of elevated core inflation in Q4 2022. The possibility that lagged supply chain effects are still working their way through the system advises a “wait-and-see” approach for the Fed, especially now that the lagged effects from rapid Fed hikes in 2022 are being felt.