Shipping costs driving inflation

We've heard a lot about how energy costs are driving inflation but another variable in the equation is shipping costs. About 80 per cent of the world's traded goods are shipped by sea, most inside 40-foot-long steel containers stacked atop some of the largest sea-going vessels ever built, the International Monetary Fund (IMF) noted in a blog published on Monday.

This gigantic maritime network of container trade – from Shanghai to Rotterdam to Los Angeles – underscores the global economy, but it has been upended by the pandemic.

“Ports lacked workers who were home sick. Truck drivers and ship crews couldn’t cross borders because of public health restrictions. Pent-up demand from huge stimulus programmes during extended lockdowns overwhelmed the capacity of supply chains,” the IMF said.

The upshot was a seven-fold spike in shipping costs in the 18 months following March 2020. Shipping costs are an important driver of inflation, it said, noting that when freight costs double headline inflation picks up by 0.7 per cent.

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The IMF’s blog post also noted that the effects were “quite persistent”, peaking only after a year and lasting up to 18 months. This means the increase observed now will be with us for some time.

It calculated that the increase in shipping costs observed in 2021 could increase inflation by about 1.5 percentage points in 2022. “While the pass-through to inflation is less than that associated with fuel or food prices –which account for a larger share of consumer purchases – shipping costs are much more volatile,” the IMF said.

The fund indicated that the inflationary impact of shipping costs would continue to build through the end of 2022. “This will create complicated trade-offs for many central bankers facing increasing inflation and still ample slack in economic activity,” it said.

"Moreover, the war in Ukraine is likely to cause further disruptions to supply chains, which could keep global shipping costs – and their inflationary effects –higher for longer," it said. We have been warned.