The Fed thinks about high freight rates

The Wall Street Journal has drawn attention to a report from the Federal Reserve Bank of St. Louis attempting to explain the rise in what they call “shipping costs” in both the US and across the world.

In a short piece of work called “The Dynamics of International Shipping Costs”, two of the Bank’s economists, Fernando Leibovici and Jason Dunn, have worked to understand the “rise of international shipping costs” which as they point out, have seen “the average global market price of shipping a 40-foot container increased eightfold from an average of $1,331 in the week of Feb. 28, 2020, to a peak of $11,109 in the week of Sept. 10, 2021”.

The key point that the Bank makes is that “unprecedented levels of fiscal stimulus, combined with a sharp reallocation of demand from services into durable goods, have been straining supply chains, leading to the resurgence of inflation across developed economies. Given that durable goods are particularly likely to be traded internationally, these developments have led to the increased demand for international shipping services and, thus, to the rise of international shipping costs”.

In other words, huge money printing across the world, but especially in the US, combined with a shift to internet-based retailing used by people restricted to their homes has driven-up consumption of imports.

The second factor Mr Leibovici and Mr Dunn cite is the “volatility” and “pro-cyclical” nature of shipping costs. They observe that “shipping costs”, or rather what might be more accurately described as container freight rates, can swing wildly by tens of per cent over just a year or so. They notice that “international shipping costs are pro-cyclical. The figure shows that international shipping costs are positively correlated with international trade volumes, with a correlation equal to 0.39. This suggests that international shipping costs are likely to be a function of standard demand and supply forces”.

Their conclusion is that “slightly more than half of the 72.3 percentage point increase of international shipping costs in the aftermath of COVID-19 recession is the result of standard demand and supply forces, while the remaining is the result of disruptions in international shipping”.

This is a useful piece of work in that it attempts to explain what has been an explosion in global logistics costs. It offers some understanding of where freight rates might be going in the future. However, one thing the economists at the St Louis Fed seem not to have mentioned is that the ‘supply-side’ of container shipping has seen considerable consolidation over the past ten years. This must be having an impact on prices. In addition, the “straining supply chains” they refer to have had the additional effect of unbalancing parts of the logistics system, such as container flows, that have made logistics systems less efficient than they otherwise would have been. 

Source: Transport Intelligence, 11 January 2022

Author: Thomas Cullen