Inflation's Impact on Shipping Health

The U.S. is currently facing an acceleration in inflation that the country hasn’t seen since the early 1980s. In fact, in June 2022, inflation spiked by 9.1%— the fastest year-over-year jump in four decades. 

While soaring inflation is a complex issue with many contributing factors, supply chain disruption associated with the global pandemic has certainly played a large part in the current dynamic. The shipping industry, in particular, was slammed by supply and demand-related issues, causing shipping costs to skyrocket, in some cases by as much as 10 times pre-pandemic rates. With the vast majority of global trade being moved by the sea at some point in the supply chain, it is no surprise that multiple studies indicate a strong positive correlation between shipping costs and inflation.

Below, we’ll address how the U.S. shipping industry is affected by inflation, how a possible approaching recession would impact the market, and how this all might influence the future of global trade. 

Rising Shipping Costs
A long chain of events was triggered in the global supply chain by the pandemic and ensuing lockdowns that are still being felt today. Supply shrank while demand surged, labor was short, inventory was low, and shipping was massively delayed. We saw increases in transit rates across all sectors of the industry, with a notable spike in ocean freight rates. In the middle of what some expected to be a period of recovery, we saw conflict between Russia and Ukraine, spikes in oil prices, and signs of a waning global economy on the edge of recession. 

Data from the beginning of the year revealed that ocean freight costs had jumped 29% since the previous year, resulting in a record-breaking 12-month increase.

Link to Inflation
Historically, as shipping rates go up, inflation tends to follow suit. A recent study, based on 30 years of data from 143 countries, determined that when freight rates double, inflation goes up by .07 percentage points. Additional information on economic trends show that inflation usually peaks after around 18 months, suggesting that this level of inflation could continue well into 2023. 

What’s the correlation between shipping costs and inflation? Think about it this way: Nearly 90% of the world’s goods are shipped by sea. When shipping costs increase, the price of imports and exports of approximately 90% of raw materials, component parts, finished goods, and fuel will be affected. In turn, these increased prices are passed on to the consumer in the long tail of manufacturing and distribution which can take 12 to 18 months to reach consumers’ pockets. 

Fears of Recession
In inflationary environments, prices surge and the cost of living increases while the value of savings slowly deteriorates. This can often lead to recession, and by some commonly accepted definitions i.e. the economy shrinking two quarters in a row, we are already in one. Consumer spending has slowed, but other signs of the economy are still strong. Typical signs of recession noted are reduced spending, along with low employment rates, a weakened currency, a decrease in production, and an increase in interest rates. Inflation does not always lead to a recession, and in the current market environment, it is hard to determine which way things may move and when.

Impact on Trade
With the current outlook, many are concerned about how this will impact American consumers and U.S. trade. Supply chains are experiencing a massive bullwhip from the COVID economy and inventory mismanagement. Another unexpected slowdown in consumer spending that could be caused by inflation or a full-on recession would have serious effects on the freight market and cause potential whiplash to many areas of the transportation and inventory management system.  

As for a recession, consumers will continue to buy fewer goods, including imports. We can expect the exchange rate to depreciate, which will eventually make exports cheaper and imports more expensive. What’s more, a recession could disrupt international trade flows, as seen during the Great Recession of 2007-2009.

How long will this inflation last and will it cause a recession are questions everyone seems to be asking. While much of it is out of our control, there are ways to curtail the impacts. 

For example, President Biden recently signed the Ocean Shipping Reform Act of 2022, aimed at reducing inflation. The act is geared toward preventing shipping companies from overcharging and U.S. consumers from overpaying. It gives the Federal Maritime Commission (FMC) the authority to promote fair practices between international ocean carriers and American importers and exporters. This is just one initiative designed to help stabilize the supply chain and ease inflation pains in the shipping industry.  

The future of the American economy is uncertain, but whatever direction it goes in, we can confidently assume the trade industry will feel the effects.