After a year in which shipping costs worldwide skyrocketed
in part due to massive volume increases and the impact of the pandemic,
researchers from the International Monetary Fund set out to explore how soaring
shipping costs are contributing to rising costs and inflation. They concluded
that dramatic increases in shipping costs are having a slow but consistent
impact contributing to inflation with the impact likely to continue to build
through the end of this year.
“We find that shipping costs are an important driver of
inflation around the world,” the IMF writes in its weekly blog post prepared by
the staff and officials on pressing economic and policy issues. “When freight
rates double, inflation picks up by about 0.7 percentage point. Most
importantly, the effects are quite persistent, peaking after a year and lasting
up to 18 months. This implies that the increase in shipping costs observed in
2021 could increase inflation by about 1.5 percentage points in 2022.”
The IMF research predated the war in Ukraine with their
analysis adding that the conflict will likely exacerbate global inflation. They
looked at data from 143 countries over the past 30 years, reporting that the
inflationary impact of higher shipping costs builds over time. After the
pandemic was declared in March 2020, they noted that it resulted in a shortage
of workers at ports to move containers which account for more than 80 percent
of the world’s traded goods as well as the travel restrictions that impacted
crew movement and trucking. Other factors included the creation of pent-up
demand from huge stimulus programs during extended lockdowns that overwhelmed
the capacity of supply chains.
The result of those challenges was that the cost of shipping
a container on the world’s transoceanic trade routes increased seven-fold in
the 18 months following March 2020. They also highlight that the cost of
shipping bulk commodities spiked even more.
“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. As a result, the
contribution in the variation of inflation due to global shipping price changes
is quantitatively similar to the variation generated by shocks to global oil
and food prices.”
Further, the research shows that while higher shipping costs
hit prices of imported goods at the dock within two months, and quickly pass
through to producer prices, the impact on the prices consumers pay at the cash
register builds up more gradually, hitting its peak after 12 months. This is a
much slower process than what is seen after a rise in global oil prices, which
drivers feel at the pump within a couple of months.
Rising shipping costs affect inflation in some countries
more than others the IMF reports with the structural characteristics of an
economy affecting the impact. Countries that import more of what they consume
see larger increases in inflation, as do those who are more integrated into
global supply chains. Similarly, countries that typically pay higher freight
costs—landlocked countries, low-income countries, and especially island
states—see more inflation when these rise, says the IMF. A strong and credible
monetary policy framework can play a role in mitigating the second-round
effects from import prices and inflation.
The IMF concludes that the inflationary impact of shipping
costs will continue to build through the end of 2022. This they report will
create complicated trade-offs for many central bankers facing increasing
inflation and still ample slack in economic activity. 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.