In the social sciences, establishing causality can be a messy and daunting process. Not only are few phenomena monocausal, but at each moment human choices can alter conditions substantially enough that the state of the world, and thus the link between past and present, is irrevocably altered. Elapsed times are of paramount importance in analysis. In financial markets, new information may cause a nearly instantaneous repricing of securities or derivatives, while seeing the effects of a policy or macroeconomic development may take months, years, or decades.
As I described last October in An Armor Conspired: the Global Shipping Freeze, the effects of policies which constricted the lives of several billion people led to numerous unintended consequences. Stressed, frightened, and bored citizens were sent government stimulus checks, received unemployment benefits, and may have been beneficiaries of the Payroll Protection Program, all of which led to a massive consumptive binge. That, followed by port closures, scarcity of lumber and later shipping containers, the devastation of domestic freight transportation (described in Stuck in Neutral: Trucking and the Pandemic), and a variety of other factors led to historic delays and never-before-seen prices in ocean shipping.
Drewry Hong Kong-Los Angeles 40-Foot Container Rate (2017 – 2021)
A later development (and one with vastly greater political consequences) was the outbreak of inflation. After massively expansionary monetary policy measures throughout 2020 and 2021, virtually every nation saw its money supply grow at many times the rate that goods and services grew. Although the general price level began rising in early 2021, until the late summer or early fall of 2021 it was largely ignored by most central banks. The Federal Reserve called the steady price increases “transitory” for several months, only taking action after Russia’s invasion of Ukraine caused oil, gas, and certain grain prices to spike briefly.
In four months, those initial, fateful, pandemic-policy choices, including imposed lockdowns that suffocated economic activity, will be three years past. Enough time has passed, however, that some of the assertions made by political figures throughout the pandemic can be scrutinized.
Scapegoat after Scapegoat
Aware of the essentially universal public abhorrence of steadily rising prices, yet unwilling to point blame at monetary bureaucrats in the Eccles Building in Washington DC, the Biden Administration has been playing a game of musical scapegoats. Accusations for inflation have, among others, been directed at Vladimir Putin’s attack on its southwestern neighbor (no, despite a spike, energy prices were rising during the year before Russian troops crossed borders) and gas station owners (no, as prices have been rising broadly and station owners subsist on microscopic margins). The administration has also made brazenly mendacious comments about inflation along the way. Purposely conflating the month-to-month with the year-over-year July 2022 Consumer Price Index reading (exposed here) and claiming that inflation is worse “everywhere … that isn’t the United States” (conclusively disproven) were among them. But while these were simplistic, easily discredited attempts to deflect blame, the assault on ocean shipping firms has required more time for a full accounting.
There’s no doubt, of course, that cargo shipping rates soared to historic levels throughout 2021. In March 2021, economic issue carpetbagger Elizabeth Warren alleged that large shipping firms were conducting business in “anticompetitive” ways. Biden, in his 2022 State of the Union address, inveighed that:
when corporations don’t have to compete, their profits go up, your prices go up, and small businesses and family farmers and ranchers go under. We see it happening with ocean carriers moving goods in and out of America. During the pandemic, these foreign-owned companies raised prices by as much as 1,000 percent and made record profits. Tonight, I’m announcing a crackdown on these companies overcharging American businesses and consumers.
There’s much to unpack in this brief screed. Starting with the least important; there isn’t necessarily a connection between competition and profits. A firm with no competitors (wherever they might exist; none come to mind) are not, by default, profitable. Additionally, although the President seems to be asserting ocean carriers are a monopoly, the very fact that there’s more than one invalidates that contention. His argument may be that shipping firms constitute an oligopoly and further. that they are manipulating container rates via price fixing-agreements the way the Organization of Petroleum Producing and Exporting Countries (OPEC) does, but that too is nonsense.
As capital-intensive as it is, sea shipping is nevertheless a highly competitive business. This is provable: directly at odds with the Biden Administration’s assertions, as shipping rates rose, smaller firms entered the market to take advantage of high rates. Last month in Seatrade Maritime News it was revealed that:
non-alliance carriers accounted for around 5 percent of Transpacific trade as of January 2020, and peaked at almost 20 percent in August 2021. The increase in market share was down to the strong market for container lines through 2021 and early 2022, typified by high rates driven by congestion. High demand for container ocean transport outstripped supply over the period, leaving insufficient capacity and a very tight market for vessels. ‘This significantly reduces the barriers of entry for smaller carriers who can get in while the market is hot, and then exit when it blows cold. This is exactly what happened, as a large number of newcomers entered the trade,’ said Alan Murphy, CEO, Sea-Intelligence.
In other words, as the demand for sea shipping services overtook the available supply, shipping prices rose. And as they did, new upstarts entered the market eager to capture them. The market, therefore, functioned exactly as desired: high prices signaled decreasing supply amid increasing demand. That led to a reallocation of resources directed at meeting unsatisfied global demand for ships and containers. The very fact that prices rose in response to increasing consumer demand (and later fell as conditions improved) roundly debunks political accusations of anticompetitive conduct. Monopolistic conditions are characterized by prices being unresponsive to market conditions.
This did not keep the Administration from passing the Ocean Shipping Reform Act of 2022 (OSRA) in June of 2022. When it was signed into law, the President stated that “ocean carriers’ high prices and unfair practices … are a major contributing factor to increased costs for American families.” But like its partner, the so-called Inflation Reduction Act of 2022, OSRA has little to do with arresting the broad, rapid rise in prices for goods and services.
Did Rising Shipping Rates Cause Inflation?
So were zooming shipping rates responsible for the soon-to-be two-year inflationary updraft? The answer is: probably a small bit, but almost undetectably.
As shown above, the skyrocketing price increases in shipping were caused by shippers bidding up the price of seagoing transportation services. Unable to keep up with an explosion of consumption amid lockdowns, and then impacted by the scarcity of pallets and containers, port closures, and other mishaps, prices rose. For that reason, it would be more accurate to say that the skyward march of shipping prices was a secondary effect of expansionary monetary policies. Lots of “new money” found its way into goods, which overwhelmed the capacity of a shipping industry already constrained by pandemic restrictions and effects.
Did vaulting shipping prices find their way into goods prices? Probably, but not to a significant extent. Note below the five year chart comparing two measures of inflation (US Consumer Price Index and Personal Consumption Expenditure, both ex-food and energy) against three major shipping indices (the Baltic Dry Index, Freightos Global Index, and WCI Composite Container Freight Benchmark Rate).
Baltic Dry Index, Freightos Global Index, and WCI Composite Container Index vs. core CPI and PCE (2017 – present)
Note that the three shipping indices (yellow, white, and blue) began rising in mid-to-late-2020, commensurate with the first spike of stimulus-fueled consumption binging. The two inflation measures do not begin to rise until several months later, in the spring of 2021. Shipping rates were thus rising before the general price index began to rise. Next, note the temporal locations of shipping-rate peaks.
CPI (yoy, core)PCE (yoy, core)PPI (yoy, core)US Import Price Index (yoy)MonthWCI CompositeFreightos IndexBaltic Dry Indexin percentin percentin percentin percentJan 20215,2524,3981,45220.127.116.11.0Feb 20215,2384,5301,6718.104.22.168.0Mar 20214,8724,3672,0461.62.027.1Apr 20214,9844,7023,0533.03.12.310.9May 20216,2575,9082,5963.83.5311.6Jun 20218,0626,7533,3822.214.171.1241.3Jul 20219,3308,9993,29126.96.36.1990.2Aug 20219,81810,3234,1324.03.94.69.0Sep 202110,36110,8395,1674.03.95.29.3Oct 20219,66910,3213,5188.8.131.521.0Nov 20219,1869,3513,0184.94.8611.8Dec 20219,3049,4372,2175.55.06.510.3Jan 20229,4209,4371,4186.05.27.110.8Feb 20229,4779,7892,0406.45.47.811.4Mar 20228,1529,4302,35184.108.40.206.0Apr 20227,7689,1422,4046.25.08.712.5May 20227,6357,8512,5666.04.98.911.6Jun 20227,0667,0322,2405.95.08.910.7Jul 20226,7626,1201,89220.127.116.11.8Aug 20225,9865,7039618.104.22.168.7Sep 20224,0144,2621,7606.65.28.56.0Oct 20223,1453,3401,4636.35.08.24.2Nov 20222,4042,7861,3556.0N/AN/A2.7
The US Import Price Index (year-over-year) hit 11.6 percent in May 2021, its highest level since September 2011. Four months later, in September 2021, the three shipping indices hit their peak levels. In November 2021, US Import Prices returned to the highs of roughly one half year earlier. And in February and March of 2022 core inflation, as measured by the CPI and PCE (yoy) hit multi decade highs. But that was roughly half a year after the shipping costs peaked. By the time US inflation peaked, the WCI Composite was 15 percent lower than its peak, the Freightos Index was 11 percent lower than its peak, and the Baltic Dry Index 57 percent lower than the peak half a year earlier. In other words, shipping prices were well into their decline by the time inflation peaked.
Furthermore, while core inflation has become stubborn both shipping rates and US import prices have fallen markedly. The core CPI, PCE, and the Producer Price Index (PPI) have essentially drifted within a one-percent range since hitting highs in February and March 2022. In November 2022, Walmart CEO Doug McMillon commented that inflation is “especially stubborn,” while in early December, Fed Chair Jerome Powell commented that substantially more evidence was required to determine that contractionary monetary policies are working. Yet over that same time period (February to November 2022), the WCI Composite has fallen 75 percent, the Freightos Index is down 72 percent, the Baltic Dry Index has declined 34 percent, and the US Importer Price Index shows prices falling from 11.4 percent year-over-year to 4.2 percent year-over-year.
Shipping prices were rapidly ascending months before inflation began spiking.
Shipping prices peaked nearly a half year before inflation did. And finally,
While inflation measures have remained elevated within a narrow range, shipping prices have been in precipitous decline. Indeed, most are nearly down to their pre-covid level.
One final note: when the Biden Administration’s Ocean Shipping Reform Act of 2022 was signed in June 2022 (green cells, above), shipping prices were nine months past their peak and in steep decline. Both the WCI and the Freightos Indices were roughly one-third off of their highs of the previous year, while the Baltic Dry Index was 56 percent off its peaks on the day of the signing. It severely strains credibility to give the OSRA any credit for reducing shipping fees or inflation, considering how late its introduction was and how ineffectually it was designed.
The statements of government officials, therefore, that high shipping prices “caused” inflation, are keeping it elevated, or have had any more than a small and inconsequential effects on the general price level over the last two years, are essentially baseless. So, too, are the claims that sea shipping is anticompetitive. The OSRA, additionally, had between little and no effect on either shipping prices or inflation. The primary and secondary effects of spectacularly expansionary monetary policies early in the pandemic remain the prime, and virtually exclusive, culprit for the high prices and other economic distortions that persist today in the US economy and abroad.