Supply-chain pressures—which drove inflation during the pandemic—are once again trying to tell us something
One of the first signs that inflation was going to be a problem was the supply-chain crisis of 2021.
Remember last year, when it felt like everyone moved and bought a new desk so they could work from home, and the logjam at all the ports meant all those new desks were floating in the ocean, not able to be delivered for months? The war in Ukraine and strict COVID-19 lockdowns in China this year have only made things worse.
But there are now signs the pain may be coming to an end. Experts told Fortune that supply chains are beginning to heal, and that should help to reduce inflation moving forward.
Where they differ is just how long it’s going to take for the pain to go away.
The long road ahead
The New York Federal Reserve maintains something called the Global Supply Chain Pressure Index (GSCPI), which measures supply-chain constraints worldwide. The good news: It’s now down 57% from its December 2021 highs. And while New York Fed researchers said in a statement accompanying the latest index reading that supply-chain pressures still “remain at historically high levels,” the data shows the situation is improving.
Global shipping container freight rates, as measured by the World Container Index (WCI), have also dropped 37% from their September 2021 peak, according to data from shipping industry research and consulting firm Drewry.
Even though the WCI remains 84% above its five-year average, experts say the drop is evidence that global supply chains are starting the process of normalization as consumer demand begins to weaken.
Lars Jensen, CEO of container-shipping industry consulting firm Vespucci Maritime, told Fortune that over the past few years the ocean shipping industry has been in the midst of an “extreme state” where capacity couldn’t keep up with demand, but that has started to change in recent months.
“Spot rate levels continue to decline, underscoring that we are indeed into the transition phase back to normality,” he said. “We are on a slow path towards recovery, but it’s going to take time.”
The Danish shipping giant Maersk also said in its second-quarter earnings report this week that it expects ocean container shipping rates to gradually normalize starting in the fourth quarter of this year.
Maersk’s timeline for shipping normalization could be “a little optimistic,” however, according to Dawn Tiura, CEO of Sourcing Industry Group, an association of sourcing and procurement professionals. Falling consumer demand is helping to ease supply-chain pressures, but Tiura noted that there is still a backlog of materials, appliances, and cars waiting to be shipped to their final destination at ports worldwide.
“I do think the [shipping] rates are going to continue to go down,” she said. “But it’s a little optimistic to think that it’ll be righted by the fourth quarter, because of where we stand right now…I think it’s still going to take until 2023.”
At the Port of Los Angeles, the busiest in the western hemisphere, there are signs that pandemic-induced congestion is easing, but supply-chain issues remain. The port’s executive director, Gene Seroka, told CNN on Tuesday that the shipping backlog at his port has plummeted from a peak of 109 vessels waiting at sea to unload in January to just 19 vessels as of Monday.
However, he also noted in a separate interview with CBS on Monday that contentious contract negotiations with rail worker unions are causing problems once ships arrive.
“There are about 35,000 containers that are designated for rail on our docks right now,” he said. “A normal day looks more like 9,000 units.”
Tiura said this is an example of how the recent drop in shipping rates is really just one factor in a much larger global supply-chain puzzle.
“That’s the thing about supply chains…It’s really so many different chains,” she said. “It’s not just shipping, it’s not just manufacturing, it’s not just trucking or rail, it’s all of the above. And so if you put a kink in one link, it causes them all to kink. So that’s why I think the fourth quarter is overly optimistic, because until we get the railways right, and the dockworkers have a sound agreement, we still don’t know what the future could hold.”
Reworking supply chains takes time, and businesses have to ensure that their new supply chains don’t get them in trouble, too.
“You’ve got to investigate your supply chain for modern slavery, money laundering, and all the different things that could go into it. So a lot of people right now, a lot of CEOs, are saying, ‘Look, we’re not going to just say, supply, get it from anywhere, like we did in the early days of the pandemic,’” Tiura said. “Now, you have to do your research and know exactly who you’re buying from.”
Vespucci Maritime’s Jensen also noted that many importers and exporters signed annual freight contracts when prices were high, and most won’t be able to renegotiate until the end of this year or even into 2023, which should extend the timeline for supply-chain normalization.
Supply-chain relief and inflation
Even when supply-chain relief does come, Nicholas Sly, an economist with the Federal Reserve Bank of Kansas City, who has researched supply chains’ effects on inflation, said that Americans shouldn’t expect to see a reduction in consumer prices for some time.
“We are seeing some of the shipping freight rates start to ease as we’ve untangled some of the supply chains over the past couple of months,” he told Fortune. “One thing I would point to, though, is how long it takes for the decline in ocean freight rates to actually hit businesses, and then even how much longer it takes for that to hit consumers.”
Sly said it could take anywhere from a year to 18 months, or even longer, for the effects of recovering supply chains to begin reducing inflation.
“Softening shipping costs can slow some of the price pressures that consumers feel,” he said. “But, although spot rates are starting to come down, I think businesses and consumers are still feeling, and will continue to feel, the effects of supply-chain obstructions for a little while.”
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