If you were building a house in 2021, things got rough. The cost of lumber skyrocketed from $354 / 1000 board feet in May 2020 up to $1,683 in May 20211. And even if you weren’t building a house, you likely felt the same problem echoed across patio furniture, gym gear, and more.
Yes, unprecedented consumer demand, and ample money to spend, have continued to push prices and inflation indicators up. But it’s not just demand. Global freight, typically a behind the scenes actor that moves everything we eat, wear and use by air and ocean, may be a major culprit in rampant inflation.
Inflation Nation in 2021
Consumer prices for goods, excluding costs of energy and food, made record jumps in April and May, with the overall Consumer Price Index increasing 5.4% in June compared to a year ago2.
Product shortages due to changes in consumer behavior are part of that story – as demand outstrips supply, prices are rising for certain goods, and delays in the supply chain only make those shortages worse.
But as consumer spending shifted from services to goods nearly a year ago, demand for ocean freight has consistently outpaced container ship capacity, pushing freight rates to record highs.
The Freightos Baltic Index spot rate to ship a forty foot container from Asia to the US West Coast in June was nearly $7,000, more than four times the price in May 2020 before consumer spending shifted3. And with many importers paying thousands more in premium fees to secure scarce space, some businesses are paying more than $20,000 per container. These spikes are not only increasing logistics costs for importers, but also pushing prices up for consumers.
“Container space is often getting sold out at premium prices within half an hour of being released. And after that at a certain point it doesn’t even matter how much you’re willing to pay there simply is no space. Rates may not go down until certain goods just get too expensive for consumers.”
– Robert Khachatryan, COO, Freight Right Global Logistics
Global Freight’s Contribution to Inflation
In 2019, US businesses spent an estimated $48B on ocean logistics4, accounting for 1.07% of total US spending on goods, and 0.33% of all spending on goods and services5. The cost to ship a container from Asia to the US West Coast in June of 2021 – accounting for both containers shipped under annual contracts and via the spot market – has increased nearly 200% since a year prior6.
So using 2019 as a baseline, we estimate that shipping costs as a share of consumer spending have doubled to 2.14% of total spending on goods and 0.66% of total spending on goods and services. With the total price inflation reaching 5.4% in the last year, and at a much higher rate in the last two months, this back of the envelope calculation points to increased freight costs being a key contributing factor.
With economists and Wall Street watching the recent peak in inflation nervously, it’s important to note that, while shipping was barely a factor in inflation in the past, the unprecedentedly sharp rise in shipping rates in the last year is actually a significant factor to current inflation.
On a positive note, freight costs are one of the contributors to inflation that might reverse itself before long, either as spending shifts back from goods to services, or as new ships hit the water.
1Trading Economics https://tradingeconomics.com/commodity/lumber
2US Bureau of Labor and Statistics https://www.bls.gov/cpi/
3Freightos Baltic Index fbx.freightos.com
4Council of Supply Chain Management Professionals (CSCMP) 2020 State of Logistics Report, as cited in Supply Chain Digest, http://www.scdigest.com/firstthoughts/20-06-25_State_of_Logistics_Report.php?cid=16943 The $48B water logistics cost to US businesses includes domestic and export as well as import costs, but as export costs are generally a third to a fifth of import costs per container, and as import volumes far exceed export volumes, especially during the pandemic, we will use the $48B figure.
5US Bureau of Economic Analysis, Dep’t of Commerce, Table 2.3.5 Personal Consumption Expenditures by Major Type of Product, https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey
6Based on Freightos Baltic Index for spot market data and China Containerized Freight Index for contract market data, assuming 60% of volumes ship by contract and 40% by spot.