Some consumers of ocean freight services are chartering their own vessels to try to keep costs down, says an article published in Bloomberg.
Raising questions to Federal Reserve
Federal Reserve Chair Jerome Powell is going to face some big questions from Congress about the outlook for inflation, like: Will unprecedented stimulus eventually come back to haunt the U.S. economy in the form of higher costs for American consumers?
Shipping Costs
For anyone involved in global trade, surging prices already abound for everything from lumber to shipping containers.
So it’s worth looking more closely at how the U.S. central bank is monitoring elevated rates for imports and how those might feed through to higher costs of living. The recent increase in shipping costs has been “stark” and “could have meaningful implications for consumer inflation,” Kansas City Fed economists Nicholas Sly and Lee Smith wrote in an email.
Pandemic shipping
In 2016, they co-authored a paper that said “a 15% increase in shipping costs leads to a 0.10 percentage point increase in core inflation after one year.”
But in the pandemic, it’s not just costlier goods from abroad that are pummeling producers and importers, the Fed economists pointed out. Manufacturing surveys indicate longer delays in supplier deliveries and big jumps in prices paid for intermediate inputs.
“Amid these other cost pressures, importers may have less capacity to absorb the increase in shipping costs and therefore will need to pass-through some of these cost increases to their customers further along in supply chains,” they said.
Sly & Smith Perspectives
From Sly and Smith’s perspective, there are two main considerations when thinking about the magnitude of any inflation pass-through to the prices households pay:
How long will shipping rates stay this high?
The longer they do, the broader the scope for “these costs to be passed along to consumers,” they said. But given the size of the recent jump in freight rates, the pass-through might be less than their 2016 estimates indicate as “suppliers may negotiate with importers” and smaller companies get priced out of the market.
How much more margin pain can producers endure?
With multiple cost pressures and limited pricing power, “we will likely see some meaningful pass through on to consumers,” Sly and Smith said. “It may take some time to see the pass-through to consumers.” Those costs that don’t get passed to consumers will need to be absorbed somewhere along the supply chain, they said.
“Given the unusual magnitude of the cost increases along with the possibility that it soon moderates, one should always be cautious extrapolating historical episodes to what might happen to inflation this time around,” Sly and Smith said. “However, based on our prior research, it’s fair to expect that some of the recent increase in shipping costs will show through in higher consumer prices over the coming year.”
Chartered Territory
The World Trade Organization said global merchandise trade volume stayed strong in the final three months of 2020, but the Geneva-based trade body cautioned that the pace of expansion may not be sustained this year because some key leading indicators appear to have already peaked.
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Source : Bloomberg
