Slowing Inflation: Shipping Costs Point to Brighter Economic Outlook

A former International Monetary Fund official has linked the increase in shipping costs during the pandemic with a global spike in inflation, as well as suggesting that its subsequent decline will ease rising price pressures.

By October of 2021, world container rates soared to over 6 times what they had been at pre-pandemic levels. According to Jonathan Ostry, a professor at Georgetown University and former acting director of the fund’s Asia and Pacific Department, this increase was “a canary in the coal mine for the persistent rise in inflation” seen in 2022.

A recent study by Ostry and fellow researchers has revealed an alarming connection between shipping costs and price inflation – a rise in maritime-transport expenses of 100% could lead to prices rising nearly one full percentage point.

“While skyrocketing food and energy prices were making headlines, the surge in shipping costs seemed to pass largely under the radar, despite its potential inflationary impact,” Ostry wrote in the IMF post on the study. “Given the actual increase in global shipping costs during 2021, we estimate that the impact on inflation in 2022 was more than 2 percentage points — a huge effect that few central banks would dismiss.”

Ostry noted that there are certain inflation drivers that aren’t always foreseeable such as supply chain disruptions, commodity-price increases due to Russia’s invasion of Ukraine, and the unraveling of pandemic-era savings that boosted demand.

“But while policymakers may get a pass for not factoring into their decisions what was unknowable a year ago, they should be held accountable for missing known drivers of inflation, especially those that pointed to enduring price pressures. 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.”

After a spike in container shipping costs last March, prices have now fallen to their lowest rate since 2018. Drewry Shipping Consultants reported that the average cost for sending one box from Asia to the U.S has plummeted over 7-fold — down from an eye-popping $8,585 all the way to just $1,200.

With the surge of pandemic shipping costs behind us, the research by Ostry and his associates indicates that most of its inflationary impact has already been seen.

The team’s symmetric estimates would suggest that declines in shipping costs would tend to bring inflation down in the coming year, implying that the plunge in maritime-transport expenses in 2022 will contribute to a reversal of inflationary pressures.

“Shipping costs’ role as a driver of global inflation is under-recognized — this needs to change,” said Ostry. “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.”

 

Source: ttnews