Since the world emerged from pandemic-induced lockdowns, it’s the issue that every government and central bank has been focusing on – inflation. The rise in consumer prices has, to a greater or lesser extent, affected economies all over the world.
In the UK, October’s CPI (consumer price index) reading came in 4.2%, adding weight to Bank of England Chief Economist Huw Pill’s expectations of inflation reaching 5% in 2022. Meanwhile, the EU has reached 4.9% inflation, the highest the region’s seen since the introduction of the euro. And consumer prices in the US have risen 6.2% annually, a 30-year high.
This hotter-than-expected inflation has put pressure on central banks to tighten monetary policy – raise interest rates and slow down quantitative easing.
Yet, it’s not as simple as that. Some verticals of inflation, such as wage increases, are domestic, so central banks can control it through fiscal policy. But other avenues of inflation, like energy and food costs, tend to be external, especially for import-reliant economies like the UK.
In this case, there is little central banks like the Bank of England can do to reduce it. And tightening monetary policy too early risks slowing down the post-pandemic economic recovery.
One external source of inflation, which has played a huge role in the price rises you’re experiencing, is shipping costs. In the last two years, the cost of a freight has rocketed.
For example, in June 2020, the Shanghai Containerized Freight Index spot rate on the Shanghai-Europe route was below $1,000 per Twenty-Foot Equivalent Unit (TEU). At the end of 2020, the same freight jumped to about $4,000 per TEU. And by the end of July 2021, it had risen to $7,395.
According to the UNCTAD, the trade and development arm of the UN, consistent freight rates such as these could hinder the worldwide economic recovery, and push global consumer prices up by a further 1.5% next year.
Why have shipping costs risen?
Remember lockdown? If you were fortunate enough to stay financially stable, you’ll know how your spending habits changed. With the hospitality and travel industries closed, you will have likely spent a lot more of your disposable income on online shopping.
And it wasn’t just you. From the middle of 2020, going into 2021, there was a huge spike in demand for orderable goods, such as computers and furniture. This put massive pressure on the shipping industry.
However, there was a mismarriage between this demand and the supply. Container capacity and labour issues, brought on by Covid restrictions and the Suez Canal blockage, which cut off roughly 12% of global trade, led to deep issues on the supply side.
The inability of supply to keep up with demand gave rise to record-high freight costs. They now are five times the average of the last decade.
How can the higher shipping costs impact the global recovery?
The rise in freight rates has sparked a dilemma in businesses. Is it best to pass these higher costs onto the consumer? This strategy naturally means that revenue is protected but risks losing customers. It can also mean that consumer inflation increases, leaving people with less money in their pocket to spend on non-essential goods.
The other option is to absorb the hike in costs. For a business, this can help maintain customer relations. But these steeper overheads can hinder revenue, growth, and even lead to contraction.
Whether consumers or businesses are hit, persistent higher freight costs threaten to push inflation higher and curb the global economic recovery. It’s expected that continued higher freight rates could slow down production in the US and Europe by as much as 1%.
Which businesses have been most affected?
Not all businesses have been hit the same. The impact of the hike in freight rates varies largely on the product. In UNCTAD’s analysis, goods that go through complex supply chains like computers will see some of the most severe price increases.
Bulkier items like furniture will also be hit hard. The research has simulated a 10.2% increase in big-ticket homeware items.
Martin Seeley, CEO of Mattress Next Day, noted that ‘inflation starts to expand regularly in [their] economic situation.’
Knowing that there’s no way his firm can absorb the costs, Seeley’s business has been able to maintain customer relationships despite having to put prices up. One of the ways of doing this is transparency. ‘Mattress Next Day provides customers with notice of price hikes before making the changes.’
‘Also, we present options for them to lessen their purchase expenses and practically make use of their shipping fee. We extend our appreciation by giving discount vouchers occasionally since we know how hard life is during this time. That’s our way to return the favour to our customers who are still willing to continue their journey with us’, Seeley told us.
However, it’s not just larger products that are seeing supply-chain issues. Bret Bonnet, co-founder of Quality Logo Products incorporated, has found that increased shipping costs are having the largest impact on their bottom line.
The price of a cargo that contains a particularly popular product, logo-printed white ceramic mugs, now costs more than the product itself. The rise in freight costs has meant a 95% increase, before mark-up in pricing.
‘Right now, we’re selling these mugs at a negative margin just to keep our customers happy since they are a very popular product. However, our customers can expect a similar increase in the near future,’ said Bonnet.
Are higher shipping costs here to stay?
Over the past year or so, many central banks have used the word ‘transitory’ to describe the current levels of inflation.
However, according to analysis from Sea-Intelligence, a maritime data and advisory company, ocean freight rates may take two years to fall to normal. The research used past market cycles, taking into account the last five periods of increases.
How to offset higher shipping costs
The rise in freight rates is beyond our control. Some businesses are absorbing the extra costs, some are passing it onto the customers.
Although there’s nothing you can do to change hefty container shipping costs, there are other aspects of your business you can streamline to offset these steeper overheads.
Many businesses, for example, overpay when making international payments, usually due to uncompetitive exchange rates and market volatility.
But with Privalgo’s intelligent payment solutions, you can mitigate the risk of market movement, helping protect the value of your transfers. All the while, using our industry-leading exchange rates.