February 27, 2024 (MLN): The recent sharp rise in shipping costs is likely to have a smaller impact on inflation than the surge in freight costs in 2021, but it will intensify challenges for central bankers in completing the ‘difficult last mile’ of lowering inflation, says Fitch Ratings in its latest Economics Dashboard.
The surge in freight costs in 2021 led to a significant increase in inflation, with IMF estimates suggesting an impact of about 1.5pp-2pp.
However, the current jump is smaller and the economic backdrop is starkly different to 2021, when demand for consumer durable goods surged and the manufacturing sector boomed, resulting in increased demand for container shipments.
Global supply chains are no longer tight and goods consumption today is rising only moderately.
Shipping costs have increased by more than 150% since December 2023 as a result of disruptions to maritime traffic in the Red Sea.
These increases are likely to be reflected in rising import prices in the coming months, and longer shipping times will reduce supplies of intermediate inputs and consumer goods.
The outlook for shipping costs is uncertain, but a plausible scenario is that they will remain high for several quarters.
To gauge the impact on global inflation, Fitch built a model of US import price inflation based on shipping costs and oil prices.
This points to a 3.5pp increase in US import price inflation by the end of 2024.
Fitch then constructed a model for US core goods inflation based on import prices and the NY Fed Global Supply Chain Pressure Index (GSCPI) and assumed the latter rise modestly.
This indicates a rise in US core goods inflation of about 1.5pp, which would equate approximately to a 0.4pp addition to US core CPI inflation.
