Supply chains healing up faster amid inflation challenges

BLOOMBERG

Supply chains across the world are healing up almost as fast as they broke down. That doesn’t mean the pressure they’re exerting on inflation will disappear as quickly.
Take the cost of shipping containers. Spot rates from Asia to the US West Coast increased more than 15-fold during the pandemic and have since returned to pre-Covid levels as trade between the world’s two largest economies cools from a frenzied pace.
But the relief is uneven. Short-term prices for containers from Europe to the US East Coast are still more than double what they were in late-2019, according to data from Freightos Ltd.
What’s more, an estimated 70% of goods transported in steel boxes on giant ships do so under long-term contracts — not the spot market — and those deals were renegotiated in 2021 and 2022 at much higher rates. Big retailers and manufacturers may not be seeing enough shipping-rate reductions yet to warrant slashing prices further.
“We need to be cautious about the drop in spot prices for containerised freight,” said Jason Miller, an associate professor of supply-chain management at Michigan State University. “Most freight moves under contract prices that are still well above pre-Covid levels.”
Such stickiness may help explain why inflation in some regions remains stubbornly high. US producer prices rebounded in January by more than expected, underscoring persistent inflationary pressures, and another closely watched gauge of consumer costs came in hotter than forecast. In the euro area, underlying inflation hit a record in January, revised data showed.
Another reason the cost of living is slow to fall: It’s easy to underestimate how long it can take for inflationary trends to work through supply chains. That’s partly because companies don’t like to change their pricing more than a couple of times a year, according to Chris Rogers, head of supply-chain research at S&P Global Market Intelligence.
“Whilst the underlying prices have been coming down, it could take quite a long time for that to feed in,” Rogers said.
“We’re still seeing some of the inflationary hangover coming through to product pricing now and it could take much of the rest of the year for that to flow through to prices, whether it’s producer or consumer.”
There are also some temporary factors at play now, Rogers said. In order to clear backlogs of inventory built up during the pandemic’s surge in consumer demand, many companies cut prices in the second half of last year.
But now many firms are facing enduring increases in one of their biggest costs: labour.