Do Drops in Global Shipping Costs Signal an Inflation Cooldown?

The cost of shipping goods has been on the decline of late, potentially signaling some relief for the rampant rise in inflation from the last year and a shift in borrower and lender behaviors in some industries.

BY BEN STEMBRIDGE, MARKETING MANAGER, BREAKOUT CAPITAL

Are the recent drops in the costs of global shipping indicative of a potential cooldown of inflation? The answer may be yes, as several experts believe that eases in economic pressure are forthcoming. For example, Jonathan Ostry a professor of economics at Georgetown University and the former acting director of the International Monetary Fund’s Asia and Pacific departments made the case in a post on the IMF website.

Ostry says the sharp drops in maritime freight costs which peaked last year will contribute to a gradual relief in prices. Effectively acting as “a canary in the coal mine for the persistent rise in inflation” experienced worldwide during 2022, when compared with pre-COVID-19 pandemic averages, world container rates were up by more than 600% in October 2021. In a study published by Ostry’s team that examined the link between shipping expenses and global prices, inflation can increase by 0.7 percentage points due to a massive increase in maritime transport prices.

While rising shipping expenses could be monitored and potentially influence anti-inflationary action, unforeseen developments made prognosticating much more difficult, according to Ostry and team. The violence resulting from Russia’s war in Ukraine, for example, drove steep increases in food and energy prices. The understandable attention this crisis garnered might have been a contributing factor in allowing observable surges in shipping costs to “pass largely under the radar, despite its potentially inflationary impact,” Ostry notes in the IMF post. Furthermore, “Given the actual increase in global shipping costs during 2021, we estimate that the impact on inflation in 2022 was more than two percentage points — a huge effect that few central banks would dismiss.”

Ostry went on to indicate the recent significant transportation cost decrease will drive an easing in this aforementioned inflationary period, but he warned that delays by policymakers in addressing this could have furthered the risk of a recession. “It’s likely that the Fed has had to hike interest rates further to make up for its delayed start. Recession risks are very plausibly larger as a result, as are the adverse global spillovers from Fed policy.” However, with the pandemic spike in shipping effectively over, Ostry’s team suggests that most of its impact on inflation has already been seen.

Bringing us back to maritime shipping costs and their declines, Drewry Shipping Consultants recently compiled an index showing the cost of shipping a container from Asia to the United States. Previously peaking at $8,585 in March of 2022, the cost has since plummeted to as low as $1,200, the lowest mark since 2018, according to Drewry. Ostry and his colleagues wrote that their “estimates, moreover, are symmetric” and that a cooldown of current inflation pressures will be supported by global shipping expense reduction that began at the close of 2022 will drive. “Shipping costs’ role as a driver of global inflation is under-recognized. This needs to change,” Ostry explained. “Shipping cost shocks can alert central banks tasked with ensuring price stability of dangers ahead and help them reduce the risk of once again falling behind the curve.”

While time will tell if this observed drop in shipping costs will go on to calm rampant inflation, we can already start to watch for changes in industry behaviors. Credit policies will need to be nimble as current conditions change, and between shipping costs, the Federal Reserve’s actions and consumer behavior, lenders will have their work cut out for them in 2023. 

For transportation and logistics companies, the volatility in shipping rates makes them tough industries to underwrite currently. With that written, manufacturing and retail industries should benefit from a lower cost of inputs and inventory. For instance, as one of Breakout Capital’s Detroit-based borrowers told us recently, the cost of shipping goods from China to the United States has dropped significantly, allowing the client considerable flexibility compared to maritime shipping peaks in 2022, echoing Drewry’s index and prompting our next question(s): How will these rate decreases and the expected inflation cooldown affect small business borrowers directly? In industries integrally linked to global shipping, will borrowing and financial behaviors change drastically and immediately as we ramp up 2023? Or will a potential cooldown result in a gradual but very observable ease in pricing pressures across the nation and globe? We’ll have to wait to find out.