Shipping Inflation to the World

Today we saw the highest Euro Area core inflation print for 5 years (albeit driven by some one-off factors) in a week where US prices paid in the manufacturing ISM were at 10-year highs. The pandemic has created many economic side effects and one of the less-reported news items in recent weeks has been the massive surge in shipping rates.

The Shanghai Containerized Freight Index, which are weekly spot container freight rates (export) from the port of Shanghai, is at more than triple its levels in May last year. Other freight indices show a similar story.

There are a number of reasons for why this has happened. Supply growth has shrunk considerably in recent years, with the 3 major shipping alliances having become far more disciplined around capacity.
Furthermore, recent supply chain disruption from a lack of containers (boxes in the wrong place), COVID (lack of staff) and weather (East Coast cold snap) haven’t helped matters either. Then on the demand side, you’ve got the fact that economic growth has come back much stronger than many expected at the height of the pandemic last year, not least with multiple vaccines coming online as we speak.

The bigger question over the medium-to-longer term is whether this will just be a temporary phenomenon or speaks to a broader structural issue. Some argue that the freight carriers are over-earning right now and won’t be able to resist putting extra capacity into the market and order more ships, in turn, putting downward pressure on prices.

Does this rise in shipping costs portend a larger rise in inflation in 2021 as pent-up demand and excess savings are released...?