A storm is blowing in from the sea. A surge in shipping costs is part and parcel of supply-chain disruptions that are putting upward pressure on the price of many kinds of goods. Federal Reserve Chair Jerome Powell, who is watching for a tide of inflation to ebb, may have to wait longer than anticipated.
The Freightos Baltic Container Index, which reflects sea freight rates on 12 international trade routes, has more than tripled in the past year. A confluence of factors are to blame. The pandemic disrupted ports and shipping last year. Then there was a surge in demand for goods, particularly in the United States, where the government sent out over $850 billion in stimulus cheques. And a blockage in the Suez Canal earlier this year exacerbated problems. The end result is that vessels are backed up in ports, containers are in the wrong place, and goods haven’t arrived where they are needed.
International shipping charges get passed down the supply chain, especially when demand is strong, but don’t account for much of the final cost of manufactured goods. Still, the scale of the jump in container costs makes a difference. A recent European Central Bank economic bulletin estimated that a 50% annual increase in the HARPEX shipping index, which tracks the charter market for container ships, could lift the annual U.S. personal consumer expenditures price inflation by up to 0.25 percentage points one year later. This gauge has nearly doubled so far this year.
True, demand will return to more normal levels after households have spent their rescue payments and forced savings. Also, ports and shipping companies are working to clear backlogs, so supply disruptions and shipping costs will both eventually subside. But that will take time. For example, Denmark’s A.P. Moller-Maersk, which handles one in five containers shipped worldwide, has in the past month upgraded its guidance significantly and said it expected the current dynamics to last into the fourth quarter.
That may be because inventories are running low relative to orders, according to purchasing managers’ surveys, so it will take time for businesses to rebuild stocks. Also, shipping giants are wary of repeating the mistake of past economic cycles by ordering new ships too soon. But the longer it takes for supply chains to return to normal, the more time it will take for inflation to do the same.