The sharp drop in transportation costs should be a solid pillar of inflation expectations. Those freight rates are likely to fall further as consumer demand slows due to the Fed’s biggest rate hike since the 1980s. This relative weakness in freight markets supports the argument of those who believe the Fed is more dangerous to overreact to inflation than to underreact.
On the demand side, monthly imports hit a record $351 billion in March and slipped to $330 billion in July. While imports are still well above pre-pandemic levels, unprecedented Covid-19 stimulus is pouring through the system, consumers are becoming more cautious and recession speculation is more frequent. The FedEx CEO said on Sept. 15 that he believed a global recession was imminent, and the market fell the next day.
The rise in transport costs began with the reopening of essential businesses in March 2020 after the economy initially shut down to slow the spread of Covid. The rise in freight rates later turned into a spike, which was both a symptom and a big reason for the price hike. Inflation started to pick up significantly in April 2021, just a few months after a second wave of unprecedented government payments began to flow into people’s pockets.
This time last year, retailer American Eagle Outfitters Inc. warned of a “highly disrupted” supply chain and “higher shipping costs across the industry.” Companies are pushing prices up to offset an unprecedented surge in freight costs.
The discussion about shipping now, when it’s brought up, has a different tone.
American Eagle COO Michael Rempell at a Sept. 7 conference.
Last year, Dick’s Sporting Goods Inc. pushed prices up and eliminated promotions to offset higher shipping costs. Demand has surged, fuel costs have risen, and companies are struggling to persuade workers to return to key jobs like warehouses and trucking, many of whom are still flush with cash. That pressure has completely eased, Dick’s chief financial officer Navdeep Gupta said in a speech at an analyst conference on Sept. 7.
“So when we look at inflation, two of the things we’re talking about — fuel and freight rates — have come down in the last 90 days,” Gupta said. “So, if this trajectory holds, commodity costs themselves could face opposing pressures.” That’s good news for the Fed, which has raised its target rate by 200 basis points to 2.5% since March. Higher capital costs are already cooling consumer purchases of cars and homes, which is also easing transportation demand. Results for the American Trucking Association Trucks Tonnage Index were mixed, up 2.8% in August after falling 1.5% in July for the second time in the past 12 months. The index, which measures contract freight rates that are less volatile, rose in both August and July from a year earlier. Spot shipping for dry goods fell to $1.61 a mile from $2.47 a year ago, according to KeyBanc.
Supply chains are recovering, not just a drop in demand. The shock of stimulation is fading and people are returning to work. A pullback in housing construction will push some of those workers into warehouse and transportation jobs.
Historically, ocean freight rates will fall further. Before the pandemic, the cost of shipping a container from Shanghai to Los Angeles hovered around $1,500, and even after the recent sharp drop, it was only about a third of the current price. Much depends on how quickly U.S. demand for foreign goods cools and how much higher monthly imports are than before the pandemic. U.S. imports in the first seven months of the year were 28% higher than in the same period in 2019.
Freight costs won’t drop as much as ocean freight, in part because freight rates haven’t risen significantly. Also, trucking companies couldn’t buy all the new trucks they wanted when demand surged last year as a shortage of chips stifled auto production. That caps growth in cargo capacity, which will provide a buffer for a rare soft landing in the notoriously cyclical cargo business.
Still, the Fed is more concerned at this point that inflation is deeply ingrained in the psyche of businesses and consumers and spreading across the service economy, making it harder to root out. Wages are rising, and if consumers are accustomed to anticipating higher prices, it will be easier for companies to raise prices. Of course, it would be more helpful if the federal government could rein in spending and ease demand pressures.
At the very least, the transportation market is working as expected and proving that the Fed’s actions have had the desired effect. The successive declines in imports have helped lower shipping prices and smoother supply chains, essentially eliminating early causes of inflation.
More from Bloomberg Views:
• Embrace “shopping early” and cancel “Black Friday”: Thomas Black
• Want to cut your tax bill?Buying a Container Ship: Chris Bryant
• The shipping industry is struggling – for now: Chris Bryant
This column does not necessarily reflect the opinions of the editorial board or Bloomberg LP and its owners.
Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he was in charge of U.S. industrial and transportation companies and Mexico’s industry, economy, and government.
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