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Supply chains around the world are recovering almost as fast as they collapsed. That doesn’t mean the pressure they’re putting on inflation is going away anytime soon.
Take the cost of shipping containers. From Asia to the US west coast, spot rates rose more than 15-fold during the pandemic and have since returned to pre-Covid levels as trade between the world’s two largest economies cools from a frenzied pace.
But the relief is uneven. According to data from Freightos Ltd., short-term prices for containers from Europe to the US East Coast are still more than double what it was at the end of 2019.
Additionally, an estimated 70% of goods transported in steel boxes on giant ships are transported under long-term contracts – not on the spot market – and these deals were renegotiated at much higher rates in 2021 and 2022. Large retailers and manufacturers may not be seeing enough shipping cost reductions just yet to justify further price cuts.
“We have to be cautious about the drop in containerized shipping spot prices,” said Jason Miller, associate professor of supply chain management at Michigan State University. “Most freight is moving at contract prices that are still well above pre-Covid levels.”
This stickiness may explain why inflation remains stubbornly high in some regions. US producer prices rebounded more than expected in January, underscoring ongoing inflationary pressures, and another closely watched consumer cost indicator came in higher than forecast on Friday. In the euro zone, underlying inflation hit a record in January, revised data showed last week.
Another reason the cost of living is slow to come down: It’s easy to underestimate how long it can take for inflationary trends to penetrate supply chains. According to Chris Rogers, head of supply chain research at S&P Global Market Intelligence, that’s partly because companies don’t like changing their prices more than a few times a year.
“While underlying prices have gone down, it could take quite a long time for that to have an impact,” Rogers said. “We’re still seeing some of the inflationary hangover impacting product prices now, and it could take the rest of the year for that to impact prices, whether it’s producers or consumers.”
There are some temporary factors now, too, Rogers said. In the second half of last year, many companies cut prices to clear inventories that had built up during the surge in consumer demand caused by the pandemic.
labour costs
But now many businesses are facing a permanent increase in one of their biggest costs: labor.
Labor shortages are hitting supply chain industries hard, said Nicholas Sly, vice president and economist at the Federal Reserve Bank of Kansas City.
“There are several parts of the logistics sector that are actually quite labor intensive,” Sly said. “Drivers are a very significant part of that,” but warehousing also requires a lot of manpower, he said.
Training new employees is time-consuming and expensive, and this impact on productivity only adds to the cost. In addition to higher paychecks, other basic costs of doing business have increased. According to Michigan State’s Miller, long-distance motor vehicle transportation is a sector that is “nowhere near” its pre-pandemic levels.
Higher costs for diesel, industrial equipment and larger capital expenditures such as new and used trucks still abound, he said. The cost of manufacturing truck trailers and chassis, for example, remains high, according to the St. Louis Fed. Driver wages have increased significantly, as have maintenance fees for all types of cargo transportation.
“Overall, you have higher costs, so that has to translate into higher freight rates,” Miller said. “We may have seen marine spot rates return to their pre-Covid levels. We don’t see that in domestic trucking. We don’t see that in domestic rail freight prices either.”
Storage costs have not fallen in the long term either. WarehouseQuote expects warehouse prices to continue rising this year as industrial property rents and labor costs rise and vacancy rates remain below historical averages.
Still, the easing of some supply chain tensions means logistics issues are far less of a contributor to inflation than services, according to Phil Levy, Flexport Inc.’s chief economist.
In the US, consumer inflation data earlier this month showed non-food and energy commodities rose 1.4% year-on-year — a rate that should give Federal Reserve officials some comfort that their monetary tightening is having an effect if considering they target annual inflation of 2%, albeit with a separate measure. But services inflation excluding energy services is 7.2%.
“What we had was kind of a handover where it went from a really fast rising commodity inflation to a big drop in the amount that came out of commodities,” Levy said. “Not every single component of the supply chain has moved in lockstep, but things have slowed down quite a bit.”
In the recent spate of earnings reports, US retail chiefs highlighted improvements in logistics pressures, but the pricing pain isn’t necessarily over.
“While supply chain issues have largely subsided, prices are still high and there is significant pressure on consumers,” Walmart Inc. chief financial officer John David Rainey said in a conference call Tuesday.
Bath & Body Works Inc. CEO Gina Boswell said she sees continued economic headwinds from prices for now, although that could change later in 2023.
“We expect to see continued inflationary pressures on our input costs in the first quarter before seeing some relief later in the year,” she said on a conference call last week.
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