Don’t expect shipping costs to buoy inflation

Greetings from Frankfurt, where much of the chatter is about the European Central Bank’s policy vote tomorrow.

The focus will be on how officials respond to the rise in governments’ borrowing costs in recent weeks. While that particular issue has caused difficulties for policymakers, there are grounds for optimism on trade. The export boom that began in the second half of this year has helped prop up growth in the region, notably in Germany (more on which in tomorrow’s Trade Secrets).

However, manufacturers here have not been immune to the supply chain disruptions that have emerged during the pandemic. In today’s main piece, we look at whether one of these pressures — a surge in freight rates — will eventually lead to problems for central bankers here and elsewhere in the form of higher inflation.

Freight costs and inflation

A year into the pandemic and shipping costs remain buoyant. After rising steeply over the course of the second half of last year, they’re still not sinking — as some had expected them to do over the Chinese new year period when factories there are usually shut, lowering demand for container space.

Here’s what we’re seeing on the two of the main arteries of global trade:

For those looking for an explanation of what’s driven the surge, we’d recommend this from the FT’s George Steer and Valentina Romei.

For those looking for an alternative to shipping, air freight has kept up its gains in the second half of the fiscal year (though the rise has been a lot less extreme and prices remain way below where they were before the pandemic):

In the next few weeks, expect a Trade Secrets investigation into what’s happening to rail freight too.

Stepping back, there’s a lively debate among investors and economists about the possibility of the long-dormant inflation monster returning once pandemic-related restrictions begin to ease. The argument goes that, after years of subdued price pressures, costs will begin to rise as a wave of pent-up demand (and in the case of the US) eye-watering amounts of fiscal stimulus are unleashed. So will the rise in manufacturers’ freight costs contribute to this? We don’t think so — at least the sort of spiralling wage and price dynamics we associate with the 1970s and early 1980s.

There is the possibility that, as vaccination drives take hold and economies reopen, demand will increase and manufacturers will pass on the higher transportation costs to their customers. But that demand may well lead to more spending on services. For instance, once restaurants reopen, people may want to venture out on a bike ride and eat a nice schnitzel watered down with the local beer at a guest house overlooking the river Main instead of shelling out on a Peloton. Services are, by their nature, largely local and therefore require less spending on transportation. As cases dwindle, ports and warehouses, which have faced bottlenecks in part due to workers having to socially distance or quarantine, will see pressure drop, easing the logjams we’ve seen develop throughout the supply chain, and quickening turnround times for vessels. And while prices remain sky high, they have stopped rising.

Patrik Berglund, chief executive of Xeneta, a platform for ocean and air freight rates that provided us with the data for the charts, buys this argument too. And he notes that multiyear contracts are being offered at substantially better rates than one-year ones, which suggests we will see prices fall over the coming quarters. “Vaccinations and reopenings will lead to more spending on services, and less on consumer durables. I also expect to see insolvencies rise, which should also weigh on demand,” he said. “And at some point, containers will start to return to east Asia. Low margin commodities cannot be shifted at these price levels, and shipping companies will eventually want to lower costs to appeal to them.”

However, he thinks shipping costs are likely to sink slowly and are unlikely to fall back to the level they were before the pandemic when the shipping industry saw margins shrink and had to resort to a series of alliances to prevent more bankruptcies from occurring after the failure of South Korea’s Hanjin.

It’s worth remembering that falls in shipping costs have been among the deflationary forces emanating from world trade in recent decades. Others include the utilisation of cheaper (largely Asian) labour, and advances in technology and logistics, all of which have helped keep a lid on price rises for exactly the sort of consumer durables for which demand has boomed during the pandemic.

Neither cheap labour nor technological advances are likely to disappear just yet. But we suspect the shipping logjams and supply shortages will focus minds a little about the way in which logistics have been handled. The chip shortages that have halted car production, including here in Germany, may well lead to more building up of inventories and less reliance on just-in-time production, as well as more supply chain diversification. A poll of more than 300 supply chain professionals by supply chain automation platform Centersource and logistics media consultancy Charlie Pesti that hit our inbox yesterday found almost 90 per cent of shippers either had or were planning to diversify suppliers. There’s also talk of reshoring, which Trade Secrets has written about here.

None of that will come cheap. Trade won’t be inflationary, but current patterns of logistics and shipping might have to adjust if it is to remain the force it was in keeping costs in check.

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