Inflation's Mark on Supply Chains has endured Despite Healing.

Global supply chains are repairing themselves nearly as quickly as they were broken. That doesn't guarantee the pressure they're putting on inflation will dissipate as fast.

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Consider the cost of shipping containers. Spot prices from Asia to the US West Coast surged more than 15-fold during the epidemic and have already reverted to pre-Covid levels as commerce between the world's two largest economies slows at a frenetic pace.

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Yet, the relief is not uniform. According to Freightos Ltd., short-term pricing for containers from Europe to the US East Coast is still more than double what they were in late 2019.

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Furthermore, an estimated 70% of items transported in steel boxes on massive ships are done so on long-term contracts rather than on the spot market, and those contracts were renegotiated at substantially higher prices in 2021 and 2022. Large retailers and manufacturers may not be seeing enough savings in transportation rates to justify additional price cuts.

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"We need to be careful about the decline in containerized freight spot pricing," said Jason Miller, an associate professor of supply-chain management at Michigan State University. "Most freight flows under contract pricing that is still substantially above pre-Covid levels."

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Such stickiness could contribute to the explanation of why inflation in some areas remains obstinately high. US producer prices increased more than anticipated in January, highlighting the ongoing inflationary pressures, and on Friday, another carefully watched indicator of consumer expenses came in higher than predicted. According to updated figures released last week, underlying inflation in the euro region reached a record high in January.

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It's simple to underestimate how long it might take for inflationary tendencies to spread across supply chains, which is another reason why the cost of living is taking so long to decrease. According to Chris Rogers, head of supply-chain analysis at S&P Global Market Intelligence, this is partially the fact that businesses want to adjust their price no more than a few times per year.

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According to Rogers, it may take some time for the lower underlying pricing to be reflected in the market. "Some of the effects of the inflationary hangover are still being felt in product pricing today, and it may take much of the remainder of the year for those effects to pass through to prices, whether they are producer or consumer-related."

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In addition, Rogers noted that several transient elements are now in effect. Several businesses reduced prices in the second half of last year to clear inventory backlogs generated by the pandemic's spike in consumer demand.

Labor Costs

Yet one of their major expenses, labor, is currently experiencing steady rises for many businesses. According to Nicholas Sly, vice president, and economist at the Federal Reserve Bank of Kansas City, worker shortages are having a significant impact on supply-chain businesses.

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Sly noted that the logistics industry contains various areas that need a lot of labor. "Drivers make up a fairly noticeable portion of this," he added, adding that warehousing also needs a lot of staff. Training new hires are time-consuming and expensive, and the productivity loss just drives up prices. Other fundamental company expenditures have increased in addition to wage raises. According to Miller of Michigan State, one industry that is "not even close" to pre-pandemic levels is long-distance motor transport. 

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Diesel prices are still on the rise, as are the costs of industrial machinery and large capital expenditures like new and used vehicles, he added. Data gathered by the St. Louis Fed shows that, for example, the cost to manufacture truck trailers and chassis is still high. Both driver salaries and maintenance costs across all freight transportation modalities have climbed significantly.

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"You have more costs overall, so that will have to convert into higher freight prices," Miller said. "Ocean spot rates may have returned to their pre-Covid levels, but we're not seeing that in domestic truck transportation pricing, and we're not seeing it either in domestic rail-freight prices."

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Storage costs haven't either experienced any sort of consistent drops. Due to rising industrial real estate rentals, rising labor costs, and vacancy rates are still below historical standards, WarehouseQuote anticipates that warehouse-storage prices will climb further this year.

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But, according to Phil Levy, chief economist at Flexport Inc., certain supply-chain stresses are lessening, which implies logistical difficulties are contributing to inflation far less than services.

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Consumer inflation data released earlier this month in the US showed that commodities, excluding food and energy, increased 1.4% from a year earlier. Given that the Federal Reserve targets annual inflation of 2%, albeit using a different metric, this rate should reassure officials that their tightening of policy is working. Yet when energy services are excluded, the inflation rate for services is 7.2%.

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Levy described the situation as "kind of a hand-off," when the quantity derived from items fell significantly after seeing a pretty fast spike. Not every link in the supply chain has moved exactly in lockstep, but things have slowed down considerably.

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US retail executives acknowledged improvements in logistical difficulties in the most recent round of earnings reports, but the pricing agony isn't entirely past.

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Prices are still high, and consumers are under a lot of pressure, even though supply-chain problems have mostly subsided, according to Walmart Inc. John David Rainey, the chief financial officer, stated during a conference call on Tuesday.

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The CEO of Bath & Body Works Inc., Gina Boswell, stated that she expects price-related economic challenges to persist for the time being, however, this may improve later in 2023.

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She stated on a conference call last week that "we anticipate that we will continue to have inflationary pressure on our input costs in the first quarter before beginning to see some respite as we progress through the year."

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