Monday, March 6, 2023

Your Uncle Sam may have been right when they first stated that inflation will be transitional and the Federal Reserve may have been wrong when they decided it was not transitional and felt they needed to start raising interest rates in an attempt to curb inflation.

While it is true that excess government spending is one cause of inflation, it is not the only cause. 

Also, while it is true that raising interest rates can sometimes curb inflation, this too does not work all the time.

As it relates to government spending … money must be spent on certain items to run the country and keep us safe.  However, when the government spends money on things we really do not need just to satisfy the politicians, power brokers and lobbyist, then that will cause inflation to go up.

As it relates to interest rates being raised, that, too, can cause inflation to continue to run higher.  Let’s face it; much of America runs on the back of small businesses.  If small businesses have to borrow money to run the business and have to pay outrageous interest rates, they have no alternative but to pass that cost on to their customers in raised prices … and raised prices cause inflation.

The best way to fight inflation …

The best way to fight inflation in the words of our Vice President, Kamala Harris (when discussing immigrants crossing our southern border), is to go back to the “root cause or causes.”

Starting with Covid-19 …

We all know by now that Covid-19 brought America and other countries around the globe to a complete standstill.  This standstill was the start of our inflation dilemma. 

We have yet to punish the Communist Party of China (CCP) for allowing the virus to leak out of a lab in Wuhan China and lying about what could happen.  Now with more than 1,000,000 people dead in America and many more people dead around the globe we are feeling the financial effect of this terrible health devastation.

One of the major problems caused by Covid-19 that had to do more with inflation and less with health was the slowdown in Shipping – and that is the purpose of this article.  When a country suffers a slowdown in shipping, the cost of inflation increases simply because the cost of shipping increases.

You will also find as you read this article that China is doing something else to impact – in a negative way – the cost of delayed shipping!

The cost of shipping …

How much has the cost of shipping increased in recent years? 

From the data of FBX Freightos, as of July 2021, transpacific rates continued to set new record highs on most trade lanes.  First, what is meant by the term FEU when it comes to shipping.  FEU is a forty-foot equivalent unit (FEU).  You’ve seen these on ships, trains and trucks.  This is a shipping container whose internal dimensions measure about 40 feet long, 8 feet wide, and 8 feet tall. It can hold between 20 and 24 pallets, depending on whether they are standard pallets or European pallets.

By July 2021 (about a year and a half after the discovery of Covid-19) …

• Asia-US West Coast rates shot up to $18,346/FEU, more than 6x its level a year ago.
• Asia-US East Coast costs climbed to $19,620/FEU, 487% higher than last July.
• Asia-North Europe prices rocketed to $13,706/FEU, which also rose by more than 250% in the comparable period last year.

What’s more, transatlantic rates were increasing in July 2021, particularly on the lanes from Europe to America East Coast.

• Europe to North America East Coast prices were up by 6% to $6,013/FEU, triple their level a year ago.
• Europe to South America East Coast rates increased 56% to $3,311/FEU, nearly four times their level last year.

When shipping costs go this high this fast … it has to really effect the cost of doing business – hence raising inflation rates.

On December 10, 2021 Reuters published an article … “ANALYSIS:  SHIPPING COSTS – ANOTHER DANGER FOR INFLATION-WATCHERS TO NAVIGATE.”

Here’s some of the information found in this article at the end of 2021:

“Much like the coronavirus pandemic, and the economic disruption that it has caused, a global shipping crisis looks set to go on delaying goods traffic and fueling inflation well into 2023.

The cost of shipping a 40-foot container (FEU) unit has eased some 15% from record highs above $11,000 touched in September, according to the Freightos FBX index. But before the pandemic, the same container cost just $1,300.

With 90% of the world’s merchandise shipped by sea, it risks exacerbating global inflation that is already proving more troublesome than anticipated.

In late October at Los Angeles/Long Beach, one of the world’s biggest container ports, ships were taking twice as long to turn around as before the pandemic, RBC Capital Markets estimates.

Even if plans to unload an extra 3,500 containers each week are implemented, the Los Angeles/Long Beach backlog is unlikely to clear before 2023.”

The graphic below shows the dramatic increase of shipping rates over the two year period from the first quarter of 2020 through the fourth quarter of 2021:

In the latter part of 2021, a United Nations report said that high freight rates were threatening the global recovery, suggesting they could boost global import prices by 11% and consumer prices by 1.5% between now and 2023.

The Reuters report continued with this …

The impact also ripples out; a 10% rise in container freight rates cuts U.S. and European industrial production by more than 1%.

The retail price of a low-end refrigerator will rise 24% compared with 6.5% for a costlier brand, Ben May, head of macro research at Oxford Economics said, adding: “Companies may just stop shipping very cheap fridges, as it just won’t be worth it.”

The shipping boom was expected to abate as economic reopening allowed people to spend on travel and dining out rather than clothing or appliances.

But that theory is being challenged by new COVID variants, and the huge pandemic-time savings that customers could channel into even more goods (remember this article was written in December 2021).

During the last earnings season, toymaker Hasbro, retailer Dollar Tree and consumer goods giant Nestle were among companies bemoaning freight costs – and flagging price increases.

On March 28, 2022 IMF.ORG wrote the following:

How Soaring Shipping Costs Raise Prices Around the World

The sea carries more than 80 percent of the world’s traded goods, most of which sail inside 40-foot-long steel containers stacked by the thousands atop some of the largest vessels ever built.

Studying data from 143 countries over the past 30 years, we find that shipping costs are an important driver of inflation around the world: 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.

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.

Our findings also reveal some of the mechanisms at work. We show that higher shipping costs hit prices of imported goods at the dock within two months, and quickly pass through to producer prices—many of whom rely on imported inputs to manufacture their goods.

But 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. First, our research shows that the structural characteristics of an economy matter. 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

Our results suggest the inflationary impact of shipping costs will 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. 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.

This from Jerry Nix:  America is certainly one of those countries that imports more of what they consume.  It was not always this way … but due to the unfairness of the corporate income tax and the lower cost of labor overseas – our manufacturing has moved out of the country meaning that we now import more goods and services than we export.

On February 18, 2022 Freightwaves.com published the following:

Freight rate hikes over past 2 years unprecedented, economist says …

No one needs to tell the users of transport services how high freight rates have climbed during the past two years. But recently released producer price data from the federal government provides empirical evidence to support the painful anecdotes.

The numbers are striking. Import air cargo rates rose 80% from January 2020 through January 2022, due largely to a massive curtailment of belly cargo capacity, which in normal times accounts for about half of international air commerce. Freight brokerage rose by 45% over that time. Rates for truckload, LTL and specialized transportation increased 25%. Parcel rates rose 14.7%, while prices for warehousing services increased 20.5%, with much of that coming after July 2021 as demand spiked hard due to the ripple effect of supply chain bottlenecks at various U.S. seaports.

Shortage of Containers …

In addition to a backlog on shipping and unloading the ships sitting out in the oceans worldwide … there was a shortage of containers to ship things in since ships were not being unloaded for various reasons.  If an exporting country like China, Vietnam, Korea and others cannot get containers to use … they can’t very well ship anything to the importing countries.

Shortage of workers …

We have a shortage of containers because we have a shortage of workers to unload the full containers from ships to trucks and trains to be shipped to the destinations they need to arrive at, emptied and recycled. 

We will continue to have a shortage of workers as long as our American Government feels it is a smart thing to pay our people to stay home and not work.

In addition, in an article from Californiaglobe.com we find that China is now paying shippers a premium to return to China with empty containers to keep American producers from exporting to them or other countries.  And what are we doing about it?  NOTHING!

The bottom line:

The shipping backlog and the devious actions by countries like China is a major reason for inflation in America and across the globe (not the only reason, but a major one nonetheless).  To me inflation is transitory and will not be solved by the Fed constantly raising interest rates.  We will only get inflation under control when the American workers gets back to work and the American government punishes China and other such countries for taking advantage of us. It will also help if the Fed would quit raising interest rates which seems to be doing little except destroying the stock market and your 401(k) Retirement plans.

I’d love to see your comments!

Jerry Nix | FreeWaveMaker, LLC