Shipping Costs Drop, Trucking Activity Slows
One of the ways inflation can remain particularly stubborn is that it compounds upon itself as higher costs ripple through the economy. If food ingredients are more expensive, for example, grocery stores and restaurants are likely to increase their menu prices in order to make their margins. If the cost of a certain unit used in new cars is in short supply and the price of that unit increases, so too will the price of the car when it hits the dealer’s parking lot. If the cost to ship a pallet of toys across the Pacific Ocean has tripled in price, well, Christmas is going to be more expensive this year.
But even in the current midst of roaring inflation (and there was another CPI inflation report out this week again showing inflation still running at an overheated level), shipping and trucking rates have actually been dropping. This is a mixed economic indicator, although most economists would say it is generally bad because the drop in shipping is most likely a sign of slowing global economic demand. However, the lower costs are also a potential indicator of cooling inflation, and inflation continues to run hot all over the world including here in the United States.
What Does the Data Say
The New York Federal Reserve tracks data on global supply chain pressures and the index has shown notable signs of easing in recent months. In fact, the data have shown five straight months of declines, meaning that supply chain issues are loosening up. The chart below shows the clear spike at the outset of COVID, a subsequent drop as the global economy briefly shut down in the spring of 2020, and then another spike in the months that followed before an easing off just recently:
According to the Wall Street Journal via Carl Quintanilla, shipping costs across the Pacific Ocean are a staggering 89% lower than they were one year ago. In short, it is not nearly as expensive to ship products today than it was last year:
Why are costs down? Supply chain issues have loosened up, as tracked in the New York Fed data above. Ports are more efficiently offloading shipments. And, yes, demand is lower for global shipments in 2022 versus 2021, a time in which the demand-side of the economy was still being fueled by COVID-related stimulus and snapback conditions including a release of pent-up demand as the global economy started to emerge from the pandemic. Undoubtedly the uncertainty and destruction of the Russian invasion of Ukraine has also played a role in the tightening of global demand, as has a notable slowdown in the Chinese economy.
The Global Baltic Exchange Dry Index, which tracks worldwide shipping activity, also shows a notable drop this year following an obvious peak in 2021:
On the trucking front, Craig Fuller, who closely watches freight data and is a supply chain expert, flagged this past week that trucking activity out of Los Angeles is now at the lowest level it has been since before 2019. The light blue line in the chart below is the lowest as of early October of any of the four lines representing the last four years:
The implications of this data are the same as the global shipping data: a sign of slowing demand, which could also lead to cooling inflation. This, of course, is exactly what the Fed wants to see with the hope that negative indicators don’t go so far negative that the Fed can’t successfully engineer a soft landing.
The challenge, however, is that the Fed’s main tool is the ratcheting up of interest rates, and first and foremost this is difficult to calibrate exactly right in real time, and secondly bumping up interest rates is not going to impact these other macroeconomic variables, including the war in Ukraine and a Chinese economic slowdown.
So for now, we are in a moment of wait-and-see. Some powerful levers are being pulled in the economy on a monthly basis and it remains to be seen, needless to say, how things will play out. One thing is clear, however: the cost of shipping goods around the world has declined significantly in recent weeks. But then again, whether that savings gets passed onto consumers, however, is entirely a different question.
Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com. Follow Ben on Twitter, Facebook, or Instagram. Opinions and analysis do not represent First National Bank.