Inflation and Shipping Costs Hit All-Time Highs
In the wake of the Federal Reserve’s recent announcements that they will reduce their balance sheet by as much as $95 billion per month — with anticipation they will deliver two half-point interest rate hikes in the coming months — inflation remains at approximately 8.5%, its highest level in over 40 years. The warning signs are so stark, in fact, that some economists feel the drastic counteractive actions required by the Fed may tip the economy into recession.
“With the Fed seemingly feeling the need to ‘catch up’ to regain control of inflation and inflation expectations, a rapid-fire pace of aggressive interest-rate increases heightens the chances of a policy misstep that could be enough to topple the economy into a recession,” said James Knightley, chief international economist at ING, to Reuters. By the end of 2022, the federal funds rate is now expected to be between 2.00% and 2.25%, which is 50 basis points higher than the median forecast just last month.
The myriad of impacts this will have on the global supply chain are obvious, especially in rising shipping and transportation costs.
“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,” said the International Monetary Fund (IMF). 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.”
Even more concerning, IMF’s outlook beyond 2022 is equally bleak. “Our results suggest the inflationary impact of shipping costs will continue to build through the end of 2022,” it says. “This will create complicated trade-offs for many central bankers facing increasing inflation and still ample slack in economic activity. Moreover, 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.”
Indeed, according to the AFS Logistics and Cowen Research Launch Index, shipping costs across the board are expected to reach an all-time high in 2022. In response, many shipping and logistics companies have no choice but to pass at least a portion of these costs on to customers. Even Amazon, which is known for maintaining razor-thin margins on all aspects of its business including its fulfillment services, has announced a 5% fuel and inflation surcharge on third-party sellers, mirroring the already inflated surcharges added by FedEx and UPS since the beginning of the year. As a result, cost increases trickle down the supply chain to manufacturers, who then pass the costs to consumers, creating an ever-quickening inflationary spiral.
The only real solution for manufacturers who wish to minimize these additional losses is to maximize efficiency when possible, moving away from a piecemeal just-in-time inventory approach to large, single orders that limit the shipping charges needed to be paid. This, however, will also require a rethinking of inventory procurement strategies, including inventory storage strategies and financing strategies.