By Yan Carrière-Swallow, Pragyan Deb, Davide Furceri, Daniel Jiménez and Jonathan D. Ostry
The sea carries more than 80% of the world’s traded goods, most of which sail inside 40-foot-long steel containers stacked in their thousands on some of the largest ships ever built.
The shock of the pandemic has underscored how crucial shipping container trade is to the global economy. From Shanghai to Rotterdam to Los Angeles, the coronavirus has upended supply chains. The ports lacked sick workers. Truck drivers and ship crews could not cross borders due to public health restrictions. Pent-up demand from huge stimulus programs during extended shutdowns has exceeded the capacity of supply chains. In addition to causing delays in getting goods to customers, the cost of getting them to customers has skyrocketed.
As the chart of the week shows, the result of these challenges has been that the cost of shipping a container on the world’s transoceanic trade routes has increased sevenfold in the 18 months since March 2020, while the cost of shipping bulk goods has increased further. Our new research shows that the inflationary impact of these higher costs is set to continue to rise through the end of this year. Our analysis predates the war in Ukraine but is not isolated from it: the conflict will probably exacerbate global inflation.
By studying data from 143 countries over the past 30 years, we find that shipping costs are a major driver of inflation around the world: when freight rates double, inflation increases by about 0, 7 percentage points. More importantly, the effects are quite persistent, peaking after a year and lasting up to 18 months. This implies that the increase in shipping costs seen in 2021 could raise inflation by around 1.5 percentage points in 2022.
Although the impact on inflation is less than that associated with fuel or food prices, which represent a larger share of consumer purchases, shipping costs are much more volatile. As a result, the contribution to the change in inflation due to changes in world shipping prices is quantitatively similar to the change generated by shocks to world oil and food prices.
Our results also reveal some of the mechanisms at work. We show that higher shipping costs affect the prices of imported goods at the dock within two months and quickly pass through to producer prices, many of which rely on imported inputs to manufacture their goods.
But the impact on the prices consumers pay at checkout accumulates more gradually, peaking 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 pumps within 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 experience larger increases in inflation, as do those that are more integrated into global supply chains. Likewise, countries that typically pay higher transport costs—landlocked countries, low-income countries, and especially island states—see more inflation when these rise.
Second, a strong and credible monetary policy framework can help mitigate the second-round effects of import prices and inflation. Our analysis shows that maintaining well-anchored inflation expectations is key to containing the effect of soaring shipping costs on consumer prices, especially basic measures that exclude fuel and food.
Our results suggest that the inflationary impact of shipping costs will continue to strengthen through the end of 2022. This will create complicated trade-offs for many central bankers faced with rising inflation and a still-significant downturn in activity. economic. Additionally, 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.
