A sharp decline in transport costs will act as a strong anchor for inflation expectations. These freight costs are likely to fall further as consumer demand slows in response to the Federal Reserve’s biggest interest rate hike since the 1980s. This relative weakness in freight markets strengthens the argument for those who overreact to Fed inflation rather than underreact.
On the demand side, monthly imports hit a record $351 billion in March and fell to $330 billion in July. While imports are still above pre-pandemic levels, unprecedented Covid-19 stimulus is flowing through the system, and consumers are becoming more wary of being thrown more often by speculation about a recession. The CEO of FedEx Corp. said on Sept. 15 that he sees a global recession, 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 and a major contributor to higher prices. Inflation rates started heating up noticeably in April 2021, just months after the second wave of unprecedented government payments began flowing into people’s pockets.
At this time last year, retailer American Eagle Outfitters Inc. warned of “highly disrupted” supply chains and “high transportation costs across our industry.” Companies pushed for price hikes to offset the unprecedented rise in freight costs.
Now the discussion about freight, when it is brought up, has a different tone.
“Shipping delays and disruptions are easing, transit times are shorter and freight costs, while still elevated at pre-pandemic levels, are down significantly from last year’s highs,” said Michael Rempel, American Eagle’s chief operations officer. . September 7 conference.
Last year, Dick’s Sporting Goods Inc. Push through price increases and drop promotions to offset jumps in shipping costs. Demand was rising, fuel costs were rising and companies were struggling to squeeze workers, many still flush with cash, back to core jobs like warehousing and trucking. That pressure has completely subsided, Dick’s chief financial officer, Navdeep Gupta, said during a presentation at an analyst conference on Sept. 7.
“So we look at inflation, the two things we’ve talked about — fuel and freight costs — have come down over the last, call it 90 days,” Gupta said. “So if that trajectory holds, there could be an opposing pressure that will come on commodity prices.” That would be good news for the Fed, which has raised its target rate by 200 basis points to 2.5% since March. Higher costs of capital are already cooling consumer purchases of autos and homes, which also ease transportation demand. The American Trucking Association’s truckload tonnage index showed mixed results, increasing 2.8% in August from the previous month after falling 1.5% in July for just the second time in the past 12 months. The index, which measures less volatile contracted freight, still rose from a year earlier in both August and July. Spot rates for dry goods trucking fell to $1.61 per mile from $2.47 a year ago, according to KeyBank.
The supply chain is healing, and it’s not just because of reduced demand. The stimulus is winding down and people are going back to work. A pullback in home construction will drive some of these workers into warehousing and transportation jobs.
Historically, rates for ocean shipping have come down even further. Before the pandemic, the cost of moving a container from Shanghai to Los Angeles was $1,500, about a third of the current price even after the recent steep decline. Much will depend on how quickly U.S. demand for foreign goods cools and how well those monthly imports stabilize above pre-pandemic levels. US imports for the first seven months of this year were 28% higher than the same period in 2019.
Trucking costs may not be as low as ocean shipping, partly because trucking rates have not increased as much. Also, trucking companies were unable to buy all the new trucks they wanted when demand was picking up last year because chip shortages hampered vehicle production. That puts a lid on freight capacity growth, which will provide a cushion for a rare soft landing in the notoriously cyclical trucking business.
Still, the Fed is more concerned at this point that inflation has sunk deep roots into the psyche of companies and consumers and spread to the service economy, making it harder to eradicate. Wages are rising, and companies have an easier time raising prices if consumers are conditioned to expect these increases. Of course, it would also help if the federal government reined in spending and eased some of the pressure on demand.
The transportation market, at least, is working as it is supposed to and makes the case that the Fed’s actions are already having the desired effect. The gradual reduction in imports is helping to lower shipping costs and making supply chains more fluid, essentially neutralizing the primary cause of inflation.
More from Bloomberg Opinion:
• Embrace ‘Shop Early’ and Ditch ‘Black Friday’: Thomas Black
• Want to reduce your tax bill? Buy a Container Ship: Chris Bryant
• The shipping industry is moving it forward — for now: Chris Bryant
This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.
Thomas Black is a Bloomberg opinion columnist covering logistics and manufacturing. Previously, he covered US industrial and transportation companies and Mexico’s industry, economy and government.
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