Insight - Don’t count soaring freight costs among inflation worries

Businesses must either absorb the higher freight rates or pass them on to customers, and in some cases inventory might not be available at all.

SOARING freight costs have been one of the key pain points in the United States economic recovery this year, contributing to inventory shortages and higher prices.

It’s still unclear to what extent and how quickly these higher prices might ease as the recovery progresses. Regardless, they should be seen as what they are: a shock that’s having a cooling effect on economic activity, rather than a long-term driver of inflation.

We’ve been here before, in the 2000’s with high oil prices and a few years ago with tariffs. If freight costs do come down over the coming months, they’ll work as a kind of economic stimulus that would help offset any tightening of monetary policy the Federal Reserve (Fed) might do over that time.

Freight rate increases have been significant – 40-foot containers that cost US$2,000 (RM8,483) to ship a year ago can cost as much as US$20,000 (RM84,830) now, depending on circumstances.

While this becomes a headache for anyone shipping goods around the world, which for many US businesses means importing from Asia, it’s a bigger problem for bulky, low-priced items; you can fit more US$1,000 (RM4,242) smartphones into a shipping container than you can US$1,000 (RM4,242) sofas.

Businesses must either absorb the higher freight rates or pass them on to customers, and in some cases inventory might not be available at all.

In the fast-moving environment we have right now it’s difficult to isolate the impact of higher freight rates on the overall economy, but a good way of thinking about it might be akin to an increase in tariffs. We saw what happened when former president Donald Trump escalated the trade war with new tariffs in 2018 and 2019 – economic uncertainty increased and business confidence declined with the ISM Manufacturing Index slumping between early 2018 and the end of 2019.

A related dynamic occurred in the 2000’s when oil prices were surging due to fears of “peak oil” as consumption grew from China and other emerging-market countries. Economic growth was slower than it should have been as consumers and businesses had to spend more on higher-priced oil and related products such as gasoline, leaving less money for spending on other goods and services.

In both cases, the negative impact on growth was worsened by sub optimal monetary policy. In the mid-2000’s, and even until the middle of 2008, the Fed misread higher oil prices as an inflationary risk rather than as a headwind to economic growth.

In 2018, the Fed continued to increase interest rates even as the trade war was offsetting any economic benefit stemming from the new Tax Cuts and Jobs Act.

So, we’re fortunate that the elevated unemployment rate right now has led the Fed to look beyond the impact of high freight prices and other factors that are pushing inflation higher; in a more normal economic environment, such a drastic rise in freight prices may have led the Fed to tighten monetary policy already.

To the extent investors are worried about the Fed winding down its asset purchase program or increasing interest rates over the next couple of years – and the negative impact that might have on economic growth – freight prices coming down are a counterbalance to that.

Right now the economy is benefiting from easy monetary policy and loose financial conditions, but it’s also suffering from elevated freight prices, and depending upon the industry, the latter might be a bigger factor than the former.

A furniture importer or retailer would probably be willing to accept a few interest rate increases from the Fed if it meant shipping container rates returned to more normal levels.

It’s important to understand the effect of these high prices because of the mistaken interpretation of similar price increases we’ve seen in the past 20 years. The exogenous shock of high energy prices – or freight prices, or tariff increases – are not the sort of things that lead to runaway inflation.

They actually lead to slower economic growth than we otherwise would have gotten. As it pertains to today, a decrease in freight rates would serve to boost economic growth over the next couple of years, a perhaps-underappreciated scenario in a time when people are more focused on inflation and the Fed. ― Bloomberg

Conor Sen is a Bloomberg Opinion columnist and the founder of Peachtree Creek Investments. The views expressed here are the writer’s own.

Article type: metered
User Type: anonymous web
User Status:
Campaign ID: 46
Cxense type: free
User access status: 3
Join our Telegram channel to get our Evening Alerts and breaking news highlights

freight , inflation , economy , businesses , fed , retailer ,


Next In Business News

Taming multicloud chaos
MIER sees rocky road ahead for businesses
Ringgit opens marginally higher as greenback trades sideways
Bursa set to end July on weak note as KLCI extends losses
Maybank maintains 'buy', target price on Frontken
Lim Seong Hai Capital surges on LEAP Market debut
Robust earnings ahead for Tasco
Space station mishap prompts NASA to postpone launch of Boeing Starliner
Rights group asks US customs to probe Goodyear Malaysia over labour practices
Money rolls in for Europe Inc as companies banish pandemic blues

Stories You'll Enjoy