Inflation is trending down, but more work needs to be done

When looking at the current state of the economy, specifically with a freight transportation and logistics focus, it seems like, in different ways, that there may be cause for optimism as well as concern.

For one thing, while it remains at a high level, to be sure, inflation is heading down, which is good news. For the month of November, the United States Department of Labor’s Bureau of Labor Statistics (BLS) reported that the annual inflation rate headed down for the fifth straight month, coming in at 7.1%, lower than October’s 7.7%.

Again, that is still much higher than preferred, but it does represent its lowest level going back to December 2021 and also beat an estimate of 7.3%. So, while this tally is not necessarily cause for a major celebration, it needs to be acknowledged all the same. And why wouldn’t it, especially when taking into account all of the attention it has received for quite some time now?

Take, for example, a 2022 Logistics Management reader survey.

In short, the survey, based on feedback from 100 freight transportation, supply chain, and logistics stakeholders, reinforced the impact of how inflation has continued to affect things, from both an operational and business perspective.  As for how, or in which ways, some of the key themes focused on things like capacity constraints across multiple modes; rate and price increases; rising fuel prices; supply chain unreliability; surcharge and accessorial increases; raw material price increases; delayed orders and longer lead times; and a shipping container imbalance, among others.

It is important to keep in mind that some of the things on that list are not as prevalent, nor as impactful, as they previously were, like, for example, diesel prices, which have seen declines in recent weeks, and also the shipping container imbalance, which is abating on the West Coast.

Doug Waggoner, Chairman and CEO of Echo Global Logistics, explained to me that when Echo’s shipper customers ask to work with the company to lower rates, it comes with the caveat that it is relative.

“That is a good point, in that it is inflationary, much more so than what you hear from the government or on the news,” he said. “Supply chain costs are embedded in the price of every product, so when transportation costs are going up 30% and your supply chain costs are 6% of your price of goods, they just went up a couple of percentage points. A lot of shippers are having to raise their own prices on their products to their customers, and it has a ripple effect throughout the economy.”

And that ripple effect is something we have all been seeing, hearing about, and dealing with for quite some time now, obviously.

Waggoner’s comments were in line with a recent conversation I recently had with London-based independent supply chain economist Chris Rogers. Rogers made the point that there have been various causes driving the current round of inflation.

“The initial phase was elevated demand for stuff,” he said. “That gave an added impetus throughout the supply chain, particularly to the commodity end. Then, in the beginning of 2022, you get the war in Ukraine, and that gives all of these things a boost. More recently, there has been this kind of realization of demand coming down in China, coupled with commodity price inflation seeming to go away. But there is this new part of inflation coming up behind it, which is wage cost inflation. And that is the challenge for shippers directly, because their staff wants to be paid more.”

That wage cost inflation is the reason that could keep inflation hovering between 5%-to-7% in 2023, explained Rogers. What’s more, he reiterated that wages are the driver for that, adding that commodity prices would need to not just normalize—they would need to come down in order to offset that.  

So, what might drive commodity prices down significantly from current levels?

For one, Rogers said peace in Ukraine would be a start. Another would be what he called a “solid recession,” to cool things down, as well as keeping a close eye on where fuel reserves stand, as the White House has driven down the nation’s crude oil reserve levels, while the main transport fuels are obviously well exposed to things like weather and where things are going.

Bloomberg analyst Lee Klaskow noted that inflation is likely to remain intact for a while, adding that hopefully ongoing actions being taken by the Federal Reserve will bring it down to a more manageable number.

“A world of 0%-to-2% inflation is probably not what we will see for a very long time,” he said. “It may be that 3%-to-4% becomes the new norm once we come off of this current cycle.

Where things go from here, for inflation, remains to be seen, given the myriad macroeconomic, supply chain, and freight variables we keep an eye on. While the rate of decline is not significant, it is, at least going in the right direction, which is a positive as the calendar turns to 2023.