Shadow Inflation and the Effect on Inventory Carrying Costs

By Logan Wamsley

Most people are familiar with the concept of inflation, a monetary phenomenon that occurs when individual currently loses its value. As a result, basic goods and services increase their prices to maintain profitability, while personal income such as wages often stay stagnant as individuals see their dollars stretching less and less. Taken to its extreme, inflation creates situations like what was seen in post-WWI Germany, when workers would have to paid with literally wheelbarrows full of money due to its almost negligible value (in some cases, money was even burned for warmth). While the situation is nowhere near as dire as that, the U.S. is currently experiencing the worst bout of inflation in a decade, due primarily to issues related to the COVID-19 pandemic. As of this writing, the inflation rate from 2020 to 2021 stands at 5.39%.

What is less known, however, is the phenomenon known as “shadow inflation”. While the effect is the same, the cause is slightly different; instead of the cost of goods and services rising, costs instead remain the same on the surface. The difference is in the quantity and quality of goods and services. A bottle of soda may be slightly smaller, or a bag of potato chips may be slightly less full, but the price tag remains unchanged. In the end, the customer ends up paying the same, but the decrease in returns results in the same devaluation of currency as traditional inflation.

It is “shadow inflation” that is currently a cause for concern in the supply chain community. According to many supply chain analysts, ocean container shipping companies have been offering services that have significantly declined in quality from what was offered a year ago.

As an article from FreightWaves explains, this phenomenon can be most clearly seen when measuring shipping time. “If I already own a product and I took possession of it overseas at the port of departure, and it’s on my balance sheet and it’s just sitting on the water, then in inventory management, there is a charge incurred every day it’s not sold,” said Jason Miller, associate professor of supply chain management at Michigan State University. “There is the cost of capital. Every $100 in inventory is $100 that can’t be allocated elsewhere for a more value-producing purpose. There is also the cost due to obsolescence. It’s essentially opportunity costs. The longer the delay, the more additional costs from stockouts [as shelves empty] or the need to buy more safety stock.”

As shipping times increase, the inherent carrying costs will weigh more and more heavily on consumers. “A large importer pays $4,000 in freight under a contract to ship a high-value cargo of $250,000 worth of electronics in a 40-foot box,” writes Greg Miller, Senior Editor at FreightWaves. “There is a 30% annual carrying cost, in part due to high obsolescence risk, thus a carrying cost of $205 per day, so a 10-day delay would equate to an accounting cost of $2,050, adding 51% on top of the freight cost.”

Partstat Inventory Ownership Solutions and Storage Solutions were created to minimize carrying costs. In fact, through our Inventory Ownership Solutions, our customers save an average of 42% in annual carrying costs, while offering the use of warehousing facilities second to none in the industry. This savings results in increased budgetary flexibility that can now allow for increased research and development, expansion, hiring new talent, or even simply increased savings to safeguard against unforeseen risks such as the COVID-19 pandemic.

With shadow inflation a very real cause for concern in today’s business landscape, manufacturers should be aware and ready.