Tuesday, October 4, 2022

Sign of Inflation Easing?

 Container ship freight costs across the Pacific have dropped 75% in the last year. Container traffic has dropped 13% as inventories grow. This also may ease over-the-road truck demand, and demand for drivers.

When inventories are high, price reductions abound to try to move “stuff.” Also, with logistics costs easing, that lowers the burden rate on that inventory bringing the cost down—and may lead to lower prices as wholesalers and retailers can bid lower for that “stuff.”

Early in my career, I was at a company where freight costs made up a greater portion of the total cost by four times (4x) compared to labor content. If we had done more outsourcing of manufacturing and assembly, the proportion would have been worse and killed the company in 2020-2021 as freight costs increased.

Strategically, we would have looked at more “on-shoring” as many companies have done since the COVID pandemic figuratively “sunk ships” and “derailed trains” and “flat tires of semis” abounded. The supply chains became less robust and made cost/price pressure increase.

Update 8/7/22: Of course, this week OPEC (including Russia) decided to reduce production that will keep upward inflationary pressure worldwide through energy costs!

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