Rising shipping cost to have smaller impact on inflation: Fitch

The surge in freight costs in 2021 led to a significant increase in inflation, with IMF estimates suggesting an impact of about 1.5pp-2pp. However, the current jump is smaller and the economic backdrop is starkly different to 2021, when demand for consumer durable goods surged and the manufacturing sector boomed, resulting in increased demand for container shipments. Global supply chains are no longer tight and goods consumption today is rising only moderately.

Shipping costs have increased by more than 150 per cent since December 2023 as a result of disruptions to maritime traffic in the Red Sea. These increases are likely to be reflected in rising import prices in the coming months, and longer shipping times will reduce supplies of intermediate inputs and consumer goods. The outlook for shipping costs is uncertain, but a plausible scenario is that they will remain high for several quarters.

To gauge the impact on global inflation, Fitch built a model of US import price inflation based on shipping costs and oil prices. This points to a 3.5pp increase in US import price inflation by end-2024. We then constructed a model for US core goods inflation based on import prices and the NY Fed Global Supply Chain Pressure Index (GSCPI) and assumed the latter rises modestly. This indicates a rise in US core goods inflation of about 1.5pp, which would equate approximately to a 0.4pp addition to US core CPI inflation.

ALCHEMPro News Desk (RR)