Freight costs fueled inflation. Can they dampen it now?

Companies are mentioning freight costs much less frequently during this season of conference calls than they did a year ago, and when they have discussed them, the conversation has revolved around a sense of relief. That's a good sign for easing inflation.

It's easy to see why. The price to ship a maritime container on the benchmark Shanghai-to-Los Angeles route has plummeted to $4,252 from a record $12,424 almost exactly a year ago, according to Drewry Shipping Consultants. Spot trucking rates not including fuel surcharges have dropped 30% so far in the third third quarter from the period a year earlier, according the KeyBanc Capital Markets. Transportation companies add surcharges to cover fuel cost increases, which means the freight bill to shippers is falling along with lower diesel prices. US on-highway diesel prices dropped to $4.96 a gallon on Sept. 19 from a record $5.78 on June 27, according to weekly data from the Energy Information Administration.

The steep decline in transportation costs should serve as a sturdy anchor for inflation expectations. Those freight costs will most likely fall more as consumer demand slows in reaction to the Federal Reserve's biggest interest-rate increases since the 1980s. This relative weakness in the freight market bolsters the argument for those who see more danger in the Fed overreacting to inflation than underreacting.

On the demand side, monthly imports peaked at a record $351 billion in March and slid to $330 billion in July.  While imports are still well above pre-pandemic levels, the unprecedented Covid-19 stimulus is being flushed through the system, and consumers are becoming much more cautious with speculation about a recession being tossed around more frequently. The chief executive officer of FedEx Corp. said on Sept. 15 that he sees a global recession coming, and markets sank the next day.  

The rise in transportation costs began when essential businesses reopened after an initial shutdown of the economy in March 2020 to slow the spread of Covid. The increase in shipping rates, which later turned into a spike, was both a symptom of and a large contributor to higher prices. The inflation rate began to heat up noticeably in April 2021, only a few months after a second wave of unprecedented government payments began to flow into people's pockets. 

At this time last year, retailer American Eagle Outfitters Inc. was warning of "highly disrupted" supply chains and "higher transportation costs across our industry." Companies were pushing through price increases to offset the unprecedented surge of freight costs.

Now the discussion around freight, when it is brought up, has a different tone.

"Shipping delays and bottlenecks are easing, transit times are shorter and freight costs, although still elevated to pre-pandemic history, have come off substantially from the highs reached last year," Michael Rempell, chief operations officer at American Eagle, said in a Sept. 7 conference.

Last year, Dick's Sporting Goods Inc. pushed through price increases and eliminated promotions to offset the jump in shipping costs. Demand was surging, fuel costs were rising and companies were struggling to coax workers, many still flush with cash, back into key jobs such as warehousing and trucking. That pressure has eased completely, Dick's chief financial officer, Navdeep Gupta, said during a presentation at a Sept. 7 analyst conference.

"So as we look to the inflation, the two things that we have talked about — fuel and the freight costs — have come down in the last, call it, 90 days," Gupta said. "So if that trajectory holds, there could be an opposing pressure that will come on the cost of goods itself."

That would be good news for the Fed, which has increased its target rate by 200 basis points since March to 2.5%. The higher cost of capital is already cooling consumer purchases of autos and homes, which also eases transportation demand. The American Trucking Associations truckload tonnage index is showing mixed results, gaining 2.8% in August from the previous month after dropping 1.5% in July for only the second time in the last 12 months. The index, which measures less volatile contracted freight, still rose from a year ago in both August and July. The spot rate for trucking of dry goods fell to $1.61 a mile from $2.47 a year ago, according to KeyBanc.  

The supply chain is healing, and it's not all just about declining demand. The stimulus jolt is wearing off and people are returning to work. The pullback on homebuilding will drive some of those workers to warehouse and transportation jobs.

Judging by history, rates for maritime shipping have further to fall. Before the pandemic, the cost to move a container from Shanghai to Los Angeles hovered at $1,500, about a third of the current price even after the recent steep drop. A lot will depend on how quickly US demand for foreign goods cools and how much above pre-pandemic levels those monthly imports settle. US imports for the first seven months of this year are 28% above the same period in 2019.

Trucking costs won't see a drop similar to those for maritime shipping, partly because trucking rates didn't jump as drastically. Also, trucking companies were unable to buy all the new trucks they wanted when demand was surging last year because the chip shortage curbed vehicle production. That kept a lid on freight capacity increases, which will provide cushion for a rare soft landing in the notoriously cyclical trucking business.

Still, the Fed is more worried at this point about inflation sinking deep roots into the psyche of companies and consumers and spreading throughout the service economy, making it more difficult to eradicate. Wages are on the rise, and companies have an easier time raising prices if consumers are conditioned to expect those increases. Of course, it would help more if the federal government would rein in the spending and take some of the pressure off demand.

The transportation market, at least, is working like it's supposed to and makes the case that the Fed's actions are already having the desired effect. The sequential decline of imports is helping lower shipping prices and making supply chains more fluid, essentially unwinding an early cause of inflation.

Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he covered U.S. industrial and transportation companies and Mexico's industry, economy and government. 

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.