According to the International Monetary Fund (IMF) the inflationary impact of shipping’s higher costs is poised to keep building through the end of this year.
Studying data from 143 countries over the past 30 years, IMF found that shipping costs are an important driver of inflation around the world. Namely, when freight rates double, inflation picks up by about 0.7%.
Most importantly, the effects are quite persistent, peaking after a year and lasting up to 18 months. This implies that the increase in shipping costs observed in 2021 could increase inflation by about 1.5% in 2022.
While the pass-through to inflation is less than that associated with fuel or food prices shipping costs are much more volatile. As a result, the contribution in the variation of inflation due to global shipping price changes is quantitatively similar to the variation generated by shocks to global oil and food prices.
IMF’s findings also reveal some of the mechanisms at work, as higher shipping costs hit prices of imported goods at the dock within two months, and quickly pass through to producer prices.
The impact on the prices consumers pay at the cash register builds up more gradually, hitting its peak after 12 months. This is a much slower process than what is seen after a rise in global oil prices, which drivers feel at the pump within a couple of months
In addition, rising shipping costs affect inflation in some countries more than others. First, the research shows that the structural characteristics of an economy matter. Countries that import more of what they consume see larger increases in inflation, as do those who are more integrated into global supply chains.
Similarly, countries that typically pay higher freight costs, such as landlocked countries, low-income countries, and especially island states, see more inflation when these rise.
Secondly, a strong and credible monetary policy framework can play a role in addressing the second-round effects from import prices and inflation. Furthermore, the analysis shows that keeping inflation expectations well-anchored is key to containing the effect of soaring shipping costs on consumer prices, particularly core measures that exclude fuel and food.
Our results suggest the inflationary impact of shipping costs will continue to build through the end of 2022. This will create complicated trade-offs for many central bankers facing increasing inflation and still ample slack in economic activity
IMF explains, adding that the war in Ukraine is likely to cause further disruptions to supply chains, which could keep global shipping costs and their inflationary effects higher for longer.
