Freight Costs Fueled Inflation. Can They Dampen It Now?

Date: Thursday, September 22, 2022
Source: Bloomberg

Companies are mentioning freight costs much less frequently during this season of conference calls than they did a year ago, and when they have discussed them, the conversation has revolved around a sense of relief. That’s a good sign for easing inflation.

It’s easy to see why. The price to ship a maritime container on the benchmark Shanghai-to-Los Angeles route has plummeted to $4,252 from a record $12,424 almost exactly a year ago, according to Drewry Shipping Consultants. Spot trucking rates not including fuel surcharges have dropped 30% so far in the third third quarter from the period a year earlier, according the KeyBanc Capital Markets. Transportation companies add surcharges to cover fuel cost increases, which means the freight bill to shippers is falling along with lower diesel prices. US on-highway diesel prices dropped to $4.96 a gallon on Sept. 19 from a record $5.78 on June 27, according to weekly data from the Energy Information Administration.

The steep decline in transportation costs should serve as a sturdy anchor for inflation expectations. Those freight costs will most likely fall more as consumer demand slows in reaction to the Federal Reserve’s biggest interest-rate increases since the 1980s. This relative weakness in the freight market bolsters the argument for those who see more danger in the Fed overreacting to inflation than underreacting.

On the demand side, monthly imports peaked at a record $351 billion in March and slid to $330 billion in July.  While imports are still well above pre-pandemic levels, the unprecedented Covid-19 stimulus is being flushed through the system, and consumers are becoming much more cautious with speculation about a recession being tossed around more frequently. The chief executive officer of FedEx Corp. said on Sept. 15 that he sees a global recession coming, and markets sank the next day.

The rise in transportation costs began when essential businesses reopened after an initial shutdown of the economy in March 2020 to slow the spread of Covid. The increase in shipping rates, which later turned into a spike, was both a symptom of and a large contributor to higher prices. The inflation rate began to heat up noticeably in April 2021, only a few months after a second wave of unprecedented government payments began to flow into people’s pockets.

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