Research from the International Monetary Fund substantiates the correlation between “volatile” global shipping costs and inflation.
“Studying data from 143 countries over the past 30 years, we find that shipping costs are an important driver of inflation around the world: When freight rates double, inflation picks up by about 0.7 percentage point. Most importantly, the effects are quite persistent, peaking after a year and lasting up to 18 months. This implies that the increase in shipping costs observed in 2021 could increase inflation by about 1.5 percentage points in 2022,” the study’s authors, Yan Carriere-Swallow, Pragyan Deb, Davide Furceri, Daniel Jimenez and Jonathan D. Ostry, wrote in an IMF blog.
They noted that more than 80% of the world’s traded goods travel by ocean in forty-foot equivalent units. And as reported by FreightWaves/American Shipper, the sharp increase in the cost of shipping goods by ocean has created a wave of speculation about the future of the global economy.
“For at least some importers, particularly smaller ones paying spot rates, ocean shipping costs are a major source of price inflation. To the extent shipping costs can be passed on, they would drive consumer price inflation for those particular imports,” a FreightWaves/American Shipper article in late October said.
At that time, spot rates per FEU on the Asia-U.S. West Coast trade lane were more than quadruple what they were in October 2020.
The IMF researchers expect the situation to only worsen.
They said that the “cost of shipping a container on the world’s transoceanic trade routes increased sevenfold in the 18 months following March 2020, while the cost of shipping bulk commodities spiked even more. Our new research shows that the inflationary impact of those higher costs is poised to keep building through the end of this year.”
The analysis was conducted prior to Russia’s invasion of Ukraine, they noted. “The conflict will likely exacerbate global inflation.”
The researchers explained in the blog that “while the pass-through to inflation is less than that associated with fuel or food prices … shipping costs are much more volatile. As a result, the contribution in the variation of inflation due to global shipping price changes is quantitatively similar to the variation generated by shocks to global oil and food prices.”
They said the analysis showed that “higher shipping costs hit prices of imported goods at the dock within two months and quickly pass through to producer prices — many of whom rely on imported inputs to manufacture their goods.”
“But the impact on the prices consumers pay at the cash register builds up more gradually, hitting its peak after 12 months,” they wrote. “This is a much slower process than what is seen after a rise in global oil prices, which drivers feel at the pump within a couple of months.”
That FreightWaves/American Shipper article in late October said that “inflation watchers will keep a sharp eye on ocean shipping, if not as a price driver then as a bellwether of what happens next. The rise in trans-Pacific spot rates and the number of ships off Los Angeles/Long Beach did coincide with rising consumer price inflation. The same correlation could hold on the way down.”
Stifel analyst Ben Nolan said in a report: “At some point, port congestion will go away. At the moment, nothing is normal, and it does not seem to be normalizing, so 2022 looks like it will still be chaotic. Inflation here we come.”
Nolan’s “chaotic” 2022 did not include new COVID lockdowns in China nor the Russia-Ukraine war.
While the IMF researchers did not address the most recent port shutdowns in China because of zero-COVID policies, they did note that the “war in Ukraine is likely to cause further disruptions to supply chains, which could keep global shipping costs — and their inflationary effects — higher for longer.”