This article is part two of a two-part series. Part one can be found here.
It is difficult to accurately assess the resulting inflation impact without knowing actual carrier results and actual aggregate pricing. Using those two factors, in an analysis of 3Q22 carrier results the annualized inflationary impact on inbound containers to the U.S. during the pandemic is estimated at $113.2 billion. The total impact globally was more than twice that amount. A study released on January 24, 2023 by economists associated with the IMF concluded that a doubling of shipping costs causes inflation to increase by roughly 0.7 percentage point and called shipping costs a smoking gun related to global inflation.
The inflation impact of container shipping is linked to actual overall pricing, but when the pricing is based on less relevant spot indices, an inaccurate assessment of inflation results. In January 2022 the Federal Reserve Bank of New York established the Global Supply Chain Pressure Index (GSCPI) that measured inflation based on twenty-seven variables. The pricing metrics used for container shipping included a half dozen spot indices on key trade lanes. Those spot indices are not reflective of actual overall sector pricing and their wide swings make the GSCPI a flawed barometer of inflation. For instance, a release on the GSCPI this month showed it near historical averages. But three of the four largest variables contributing to positive change were container spot indices. They produce a false positive reading. In July 2022 I sent an email to two authors of the GSCPI stating concerns regarding using spot indices as indicators of actual overall sector pricing and included a detailed analysis and offer to discuss. A response was never received.
There are basic shortcomings related to fundamental actual numbers in container shipping that make accurate assessments by customers and policy makers more difficult than they should be. Bad numbers lead to confusion and bad decisions, especially in the case of past things there should not be much disagreement on. Spot rates that were not indicative of actual overall pricing in a given trade lane played a role in having contracts renewed at rates higher than they otherwise would have been. More recently, the near exclusive focus on spot rates has led to giving the false impression to both the market and policy makers that sector pricing is back to pre-Covid levels and the inflation impact has fully reversed. Both are objectively and strikingly inaccurate. The false positives that can come from bad numbers are particularly pernicious as they result in inaction during times when steps could have been taken to improve things.
The energy sector is so important to the U.S. economy and national security that an entire federal agency was established to compile and disclose volume and pricing information on what has actually occurred. The Energy Information Agency (EIA) provides factual information on the overall cost of a wide array of energy products and also tracks the movement of key fuels between Petroleum Administration for Defense Districts (PADD). These were created during WWII to monitor these key commodities. The volume and pricing of overall container movements into and out of the U.S. are inextricably linked to the economy and the stable movement of those goods has national security implications.
For the same reasons that the EIA was established, a case can be made for the compilation and disclosure of overall actual pricing and volume information on containers moving into and out of the U.S. In response to a request by the Federal Maritime Commission inviting public comments on information gathering, a recommendation was made that this be done in comments submitted on September 14, 2022. The comments made the point that the additional transparency resulting from disclosure of broader actual pricing metrics would provide factual clarity and be highly constructive to better and fairer market conditions.
Opacity on what has already actually happened helps almost nobody. Much should and needs to be done to ensure that there is no repeat of container shipping gridlock and the resulting risk it would bring to both the economy and national security. But even before that a foundational change is needed to recalibrate and have the actual numbers mapped out better. The map analogy fits squarely. As good mariners realize, before proceeding you should always know position, direction, and effect.
John D. McCown is a Non-Resident Senior Fellow at the Center for Maritime Strategy. Mr. McCown co-founded a U.S. flag shipping company he led as CEO and he also formerly managed transport investments at a large hedge fund. He holds an MBA from Harvard Business School and his analysis centers on merchant shipping and maritime commerce.
The views expressed in this piece are the sole opinions of the author and do not necessarily reflect those of the Center for Maritime Strategy or other institutions listed.
Center for Maritime Strategy
By John D. McCown
This article is part two of a two-part series. Part one can be found here.
It is difficult to accurately assess the resulting inflation impact without knowing actual carrier results and actual aggregate pricing. Using those two factors, in an analysis of 3Q22 carrier results the annualized inflationary impact on inbound containers to the U.S. during the pandemic is estimated at $113.2 billion. The total impact globally was more than twice that amount. A study released on January 24, 2023 by economists associated with the IMF concluded that a doubling of shipping costs causes inflation to increase by roughly 0.7 percentage point and called shipping costs a smoking gun related to global inflation.
The inflation impact of container shipping is linked to actual overall pricing, but when the pricing is based on less relevant spot indices, an inaccurate assessment of inflation results. In January 2022 the Federal Reserve Bank of New York established the Global Supply Chain Pressure Index (GSCPI) that measured inflation based on twenty-seven variables. The pricing metrics used for container shipping included a half dozen spot indices on key trade lanes. Those spot indices are not reflective of actual overall sector pricing and their wide swings make the GSCPI a flawed barometer of inflation. For instance, a release on the GSCPI this month showed it near historical averages. But three of the four largest variables contributing to positive change were container spot indices. They produce a false positive reading. In July 2022 I sent an email to two authors of the GSCPI stating concerns regarding using spot indices as indicators of actual overall sector pricing and included a detailed analysis and offer to discuss. A response was never received.
There are basic shortcomings related to fundamental actual numbers in container shipping that make accurate assessments by customers and policy makers more difficult than they should be. Bad numbers lead to confusion and bad decisions, especially in the case of past things there should not be much disagreement on. Spot rates that were not indicative of actual overall pricing in a given trade lane played a role in having contracts renewed at rates higher than they otherwise would have been. More recently, the near exclusive focus on spot rates has led to giving the false impression to both the market and policy makers that sector pricing is back to pre-Covid levels and the inflation impact has fully reversed. Both are objectively and strikingly inaccurate. The false positives that can come from bad numbers are particularly pernicious as they result in inaction during times when steps could have been taken to improve things.
The energy sector is so important to the U.S. economy and national security that an entire federal agency was established to compile and disclose volume and pricing information on what has actually occurred. The Energy Information Agency (EIA) provides factual information on the overall cost of a wide array of energy products and also tracks the movement of key fuels between Petroleum Administration for Defense Districts (PADD). These were created during WWII to monitor these key commodities. The volume and pricing of overall container movements into and out of the U.S. are inextricably linked to the economy and the stable movement of those goods has national security implications.
For the same reasons that the EIA was established, a case can be made for the compilation and disclosure of overall actual pricing and volume information on containers moving into and out of the U.S. In response to a request by the Federal Maritime Commission inviting public comments on information gathering, a recommendation was made that this be done in comments submitted on September 14, 2022. The comments made the point that the additional transparency resulting from disclosure of broader actual pricing metrics would provide factual clarity and be highly constructive to better and fairer market conditions.
Opacity on what has already actually happened helps almost nobody. Much should and needs to be done to ensure that there is no repeat of container shipping gridlock and the resulting risk it would bring to both the economy and national security. But even before that a foundational change is needed to recalibrate and have the actual numbers mapped out better. The map analogy fits squarely. As good mariners realize, before proceeding you should always know position, direction, and effect.
John D. McCown is a Non-Resident Senior Fellow at the Center for Maritime Strategy. Mr. McCown co-founded a U.S. flag shipping company he led as CEO and he also formerly managed transport investments at a large hedge fund. He holds an MBA from Harvard Business School and his analysis centers on merchant shipping and maritime commerce.
The views expressed in this piece are the sole opinions of the author and do not necessarily reflect those of the Center for Maritime Strategy or other institutions listed.