Winds of Change?

The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.

-William Arthur Ward

Ongoing violence against shipping vessels in the Red Sea has led to a spike in global shipping rates leading to comparisons to the pandemic reopening period of 2021-2022 when there was a breakdown in global supply chains that resulted in a surge in shipping costs. Back then rising global container freight rates served as a timely leading indicator that inflation was about to explode higher. Is the recent surge in freight rates a telltale for a return of inflationary pressure? We don’t think so.

Much ink has been spilled on the failure of global supply chains during the post-COVID period. Lockdowns in the U.S. and China incited a multidimensional failure of global supply chains. We all remember the images of hundreds of container ships anchored off the West Coast, waiting to be unloaded.

Constrained retail inventories intersected with a surge in demand for goods. Americans spending more time at home increased their consumption of goods relative to services, which was supercharged by the trillions of dollars of government stimulus. Within the span of 12-months core goods inflation went from 1.3% in February 2021 to 12.3% in February 2022.

The current backdrop is much different today than it was in 2021. The U.S. supply chain is in much better shape now and inventories have been replenished. Consumers have shifted back towards a more balanced consumption of services vs. goods and household savings have been drawn down. A small share of U.S trade comes through the Red Sea so the impact should be rather isolated and there are even indications that freight rates may have peaked.

In the prior experience, the rise in shipping costs reflected a wide range of factors, a surge in demand which was met by a supply chain that could not keep up, that resulted in a supercharged inflationary cycle. This time around the shipping cost surge is a single factor in an ocean of disinflationary forces. We believe the feedthrough from higher container freight rates to consumer goods prices will be muted and offset by a deceleration in shelter price inflation. See Shelter from the Storm. Simply put, the situation today is quite different than what we experienced in 2021 and we maintain the view that the disinflationary winds will continue to blow for the time being.