Much like diesel fuel prices are linked to freight costs, inflation and shipping freight have a direct relationship as well. As shipping and supply chain costs are a major component of consumer costs for products, there is a definite correlation. However, the relationship between inflation and shipping freight is not a straight-forward proposition. In some ways, it can be looked at as a chicken or egg type scenario, as higher shipping costs lead to inflation, yet inflation can also theoretically lead to higher shipping costs. On the other hand, studies have shown rising costs to ship freight can be a leading indicator of inflation. So the pressure on freight rates that peaked last year may have been a canary in a coal mine for the inflationary trend currently underway.
How inflation affects shipping
The most basic answer as to how inflation affects shipping is that higher shipping costs mean inflation. Shipping costs have gone up exponentially after the pandemic began - peaking in September of 2021 by some measures, while the Producer Price Index had those costs continuing to rise into the start of this year. And the International Monetary Fund (IMF) finds a direct - while slightly delayed - relationship between those freight rate increases and inflation. The IMF studied data from 143 countries over the past 30 years and found that when shipping costs double, inflation increases about 0.7 percent. The impact on inflation is at its highest about a year after shipping costs peak, and can last up to 18 months according to the IMF.
So taking those calculations into the current environment, this study suggests the pandemic-related increase in shipping costs could increase inflation by about 1.5 percentage points on its own this year (and maybe even into 2023). This relationship between shipping and inflation seems especially strong when it comes to imported products, as ocean shipping rates spiked the highest in recent months. The federal government has taken note of this relationship as well, with President Biden and an unusually bipartisan Congress enacting the Ocean Shipping Reform Act to attempt to control especially soaring ocean freight rates with an eye on reducing inflation, even as those container rates have begun to go down.
On the flip side, one can certainly argue inflation contributes to higher freight shipping costs as well. Exhibit A would be fuel costs, as when the price of fuel used to power transportation modes is higher, so too is the cost to ship goods. However, as evidenced by freight rates generally decreasing - or at least moderating - in spite of inflationary pressures, the relationship between inflation and rising shipping costs is not so straight forward even as shippers' out-of-pocket costs continue to remain high.
Looking for shipping help in the era of inflation? Let us know and we'll work with you to find the right solution for your business. In the meantime, visit our Learning Center to learn more about the industry - and us. Or you can start with a few of the links below:
- Domestic Freight Services: Intermodal, Truckload, LTL
- Outsourced Managed Transportation Service Solutions
