October 1, 2022

Companies are much less likely to mention shipping costs this conference call season than they were a year ago, and when they did talk about them, the conversation revolved around a sense of relief. This is a good sign for easing inflation.

It’s easy to see why. The price to ship a sea container on the benchmark Shanghai-Los Angeles route fell to $4,252 from a record $12,424 almost exactly a year ago, according to Drewry Shipping Consultants. According to KeyBanc Capital Markets, spot freight rates, excluding fuel surcharges, have fallen 30% so far in the third quarter from a year earlier. Trucking companies are adding surcharges to cover rising fuel costs, meaning freight bills for shippers are falling along with lower diesel prices. U.S. highway diesel prices fell to $4.96 a gallon on Sept. 19 from a record high of $5.78 on June 27, according to weekly data from the Energy Information Administration.

A sharp drop in transport costs should serve as a firm anchor for inflation expectations. Those transportation costs are likely to fall more as consumer demand slows in response to the Federal Reserve’s biggest rate hikes since the 1980s. This relative weakness in the freight market bolsters the argument for those who see more danger in the Fed overreacting to inflation than underreacting.

On the demand side, monthly imports peaked at a record $351 billion in March and slipped to $330 billion in July. Although imports are still well above pre-pandemic levels, the unprecedented stimulus of Covid-19 is coursing through the system, and consumers are becoming much more cautious with recession speculation being thrown around more and more often. CEO of FedEx Corp. he said on September 15 that he saw a global recession coming, and markets sank the next day.

The rise in transportation costs began as essential businesses reopened after an initial economic shutdown 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 the higher prices. The inflation rate began to heat up noticeably in April 2021, just a few months after an unprecedented second wave of government payments began pouring into citizens’ pockets.

This time last year, retailer American Eagle Outfitters Inc. he warned of “highly disrupted” supply chains and “higher transportation costs in our industry.” Companies have sought to increase prices to compensate for the unprecedented increase in transportation costs.

Now the discussion about freight transport, when it starts, has a different tone.

“Delivery delays and bottlenecks are decreasing, transit times are shorter, and transportation costs, while still elevated at pre-pandemic levels, have retreated significantly from last year’s highs,” said Michael Rempell, chief operating officer. in American Eagle. September 7 conference.

Last year, Dick’s Sporting Goods Inc. it pushed through price increases and eliminated promotions to offset the jump in shipping costs. Demand has grown, fuel costs have risen and companies have struggled to get workers, many of whom are still strapped for cash, to return to key jobs such as warehousing and transportation. That pressure has completely eased, Dick’s Chief Financial Officer Navdeep Gupta said during a Sept. 7 analyst conference presentation.

“So as we look at inflation, the two things we’ve been talking about — fuel and transportation costs — have come down in the last, you name it, 90 days,” Gupta said. “So if that trajectory holds, there could be some countervailing pressure on commodity prices themselves.” That would be good news for the Fed, which has raised its target rate by 200 basis points since March to 2.5%. The higher cost of capital is already cooling consumer purchases of cars and homes, which is also easing demand for transportation. The American Trucking Associations truck tonnage index showed mixed results, gaining 2.8% in August from the previous month after falling 1.5% in July for only the second time in 12 months. The index, which measures less volatile contracted freight, continued to rise from a year ago in August and July. The spot rate for dry cargo fell to $1.61 a mile from $2.47 a year ago, according to KeyBanc.

The supply chain is healing and it’s not all about declining demand. The stimulus wears off and people go back to work. Abandoning house construction will force some of those workers into jobs in storage and transportation.

Judging by history, prices for sea shipping must fall further. Before the pandemic, the price of moving a container from Shanghai to Los Angeles was around $1,500, about a third of the current price even after the recent sharp drop. Much will depend on how quickly US demand for foreign goods cools and how much monthly imports settle above pre-pandemic levels. US imports for the first seven months of this year are 28 percent higher than the same period in 2019.

Shipping costs won’t drop as much as ocean shipping, in part because shipping rates haven’t jumped as drastically. Also, truckers weren’t able to buy all the new trucks they wanted when demand picked up last year because the chip shortage limited vehicle production. That has halted increases in cargo capacity, which will provide a cushion for a rare soft landing in the notoriously cyclical trucking business.

However, the Fed is more concerned at the moment about inflation that has become deeply embedded in the psyche of companies and consumers and has spread to the service economy, making it difficult to eradicate. Wages are rising, and it’s easier for companies to raise prices if consumers are conditioned to expect those increases. Of course, it would help more if the federal government reined in spending and took some of the pressure off demand.

The transportation market, at least, is working as it should and argues that the Fed’s actions are already having the desired effect. A gradual decline in imports helps lower shipping prices and makes supply chains more fluid, essentially eliminating an early cause of inflation.

More from Bloomberg Opinion:

• Accept ‘Buy Early’ and cancel ‘Black Friday’: Thomas Black

• Want to lower your tax bill? Buy Container Ship: Chris Bryant

• The freight forwarding industry does it all — for now: Chris Bryant

This column does not necessarily reflect the opinion of the editorial team or Bloomberg LP and its owners.

Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. He previously covered US industrial and transportation companies and Mexican industry, economy and government.

More stories like this are available at bloomberg.com/opinion

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