What Inflation Means for Ocean Freight Costs and the Markets It Serves

Look no further than retail prices, as it’s easy to see inflation on full display. According to the US Inflation Calculator, the current annual inflation rate is 6.0% for the 12 months ending in February 2023. Despite being less than the immediate prior year ending February 2022, it’s still overshadowed by its stark growth of nearly 4-5% per year compared to pre-pandemic levels. In fact, the all-time peak for inflation occurred in June 2022, asserts the US Bank. The 2021 inflation percentage point was significantly greater (400% more) than the 2013 rate of 1.5%. With such high growth, today’s freight forwarders and shippers need to understand how inflation impacts ocean freight costs, the current state of the ocean market, and how liners are working to keep rates in check. 

The Causes of Ocean Freight Inflation

There are thousands of potential causes of inflation, but the most prominent causes can be attributed to these factors.

• Higher shipping cost. 

• Higher warehousing costs, which are 14% higher, says CNBC. 

• Fewer labor resources.

• Limited hours of operation.

• Geopolitical turmoil.

• Changes in consumer behaviors. 

• Seasonal weather patterns. 

• Limited vessel and container production.

Keeping those causes in mind brings about a natural irony, particularly around the first cause. Higher freight inflation leads to general inflation, yet generalized inflation also leads to freight inflation. It’s a mind-bending phenomenon to consider. 

In turn, ocean freight rates rise, and as the other contributing factors swell, inflation rises again. It’s a nuance that led to the runaway rates seen in 2021. At its apex on September 10, 2021, the Freightos Baltic Index (FBX) hit $11,109. That’s an astonishing jump of more than eight times the recorded low of $1,050 on April 6, 2018. 

Why?

The answer is that a perfect storm of influences came together throughout and after the pandemic. Even as much of the world returned to work, China’s Zero-COVID policy, notes Forbes, remained, straining supply chains and limiting global trade. 

The Current State of the Ocean Market Amid Inflation & Rebalancing

There is hope on the horizon for shippers needing the ocean leg of intermodal transportation. The FBX declined to $1,463 as of March 17, 2023. Meanwhile, Drewry’s composite World Container Index decreased by 1% to $1,790.36. But it’s important not to forget the lessons learned throughout this inflation firestorm. As inflation continued and demand soared, a runaway effect hit the ocean freight market. Typical ocean shipping costs and rates increased dramatically.
Companies that relied on Asia for manufacturing felt the stinge of double-digit year-over-year growth among ocean rates. The higher e-commerce demand decimated long-held JIT fulfillment practices and contributed further to the problem.
Fortunately, the rebalancing is underway, but even with hope for the spot market to decline and diesel prices to lessen, the risk remains. Spring heralds the arrival of produce season, a time when spot trucking rates increase, and as those increases occur, a trickle-down inflation effect happens. This means that the shipping rates will inevitably lead to possible increases in global freight costs, including among ocean liners.

Even if all inflationary pressures were to abate, there are other factors to consider:

• The risk of additional COVID variants.

• The ongoing Ukraine-Russia war. 

• Political instability in the US. 

Plus, there’s the risk of the ongoing consolidation of shipping service providers that rose to meet the pandemic’s demand. More folks out of work lead to instability, the harbinger of worry, which leads to more inflation. Thus, it’s possible that right now is merely the calm before the storm of the next inflation wave.

How Ocean Liners Mitigate Inflations’ Impacts

The simplest way to lower ocean freight rates and gain control over pricing power is for liners to limit sailings. Ergo, more blanked sailings were common as rates skyrocketed in 2021. However, 2023 is on track to see more equipment back in the fold, and China lifted its stringent COVID policies only weeks ago.

Still, ocean liners are taking action to build supply chain resiliency and prevent the resurgence of massive container rate hikes, including:

• Collaborating with ports to better plan sailings and berthing schedules. 

• Leveraging more network partners that offer harbor-trans-loading services. 

• Better planning and allocating capacity to more varied shippers, including freight forwarders. 

• Gradually expanding their service ports and terminals. 

• Encouraging some shippers to leverage air versus sea.

Stay Resilient Through Ocean Freight Cost Fluctuation and Inflation With GEODIS

Any strategy for transportation management must look beyond the typical over-the-road, ground, or air shipping options. It must consider the whole picture, and since ocean freight is the most sustainable and cheapest form of transportation on the planet, it must always consider its impact. Rather than blindly hoping for better rates, today’s shippers must stay vigilant. They need a plan of action to find where and when capacity runs tight. 

That amounts to diversifying their established network partnerships and working with global leaders in freight forwarding and international trade. GEODIS is one of those partners crucial to fending off the effects of future inflationary pressures. If there is anything to be learned from recent history, it’s that the best-laid plans can and do fall victim to entirely external forces. Connect with a GEODIS expert to get started on the path to a more resilient supply chain today.