High Ocean Freight Rates Are Not the Cause of Inflation
Biden Hypes Newly Passed Ocean Shipping Reform Act as Inflation Reducer
President Biden is about to sign a piece of legislation into law: The Ocean Shipping Reform Act of 2022 (OSRA). The president claims that this “will solve a big piece of [inflation].”
The commander-in-chief said the above after making an understatement of Biblical proportions. “Inflation is a problem,” he said. I haven’t seen an understatement that big since reading Matthew 4:2, which states, “And when [Jesus] had fasted forty days and forty nights, afterward He was hungry.”
The American people are hungry for answers to inflation and, I suspect, have lost their appetite for excuses. Unfortunately, Joe Biden is not only the president of the United States but also the king of excuses. Among the things he blames inflation on is the sky-high cost of importing goods:
“As you know,” President Biden said, “one of the big reasons why prices are going up is the cost of shipping things across the Pacific, in particular.”
Ocean Shipping Is Not Causing Inflation
Let me be clear. Shipping goods across the Pacific is extremely expensive right now (though freight rates have finally seen some improvement). Freight rates have soared over the last couple of years.
However, the price of ocean shipping is not causing inflation. Period. Allow me to illustrate with an analogous story.
What Calling Freight Rates the Cause of Inflation Is Like
You go to your friend Joe’s house to watch your favorite team win the championship game on his big screen TV. Go sports, right Joe? As you sit on Joe’s Italian leather sofa, you notice a draft. No, not a draft. Your hair, which you sprayed into a blue faux hawk to support your team, is being blown in all directions. It’s downright windy inside Joe’s house. “What’s going on,” you ask him as, to keep warm, you cling to the blue security blanket you never leave home without. “Why is there a cyclone blowing in your house?”
“It’s because the glass fell out of the front window,” Joe explains.
You look over, and, sure enough, there’s no pane in the front window. Then you look around more and notice something even stranger. “There’s no glass in any of your windows, Joe! How did this happen?”
“Well, you know how I can’t stand to look myself in the mirror. Last night, it was so dark outside and so bright inside that all the windows looked like mirrors. Naturally, I had to take a baseball bat to them all.”
“Naturally,” you agree. “But then wouldn’t you say the cause of the wind in your house is you shattering all the windows with a baseball bat?”
“Er, well, you know,” Joe angrily stutters in response, “the glass falling out of the front window is a big reason why it’s windy in here!”
The Glass Didn’t Shatter By Itself
Like the glass didn’t just fall out of Joe’s front window, ocean freight rates didn’t suddenly shoot up out of nowhere.
We closed schools and businesses, making everyone stay at home. Then, while no one could spend money on travel, entertainment, and services as they normally would, we started handing out stimulus checks like they were candy. All that extra money caused massive buying of goods. We exploded consumer spending, especially through online shopping, and sent shipping demand much higher than our ports could handle.
Not only does increased demand drive freight rates up, so does port congestion. For years, the powerful labor unions at this country’s ports have fought automation, causing U.S. ports’ efficiency to lag behind many of their counterparts around the world. We added limited hours and COVID restrictions to the dockworkers at the ports, further hurting efficiency when demand caused us to need efficiency the most. It was no freak thing that freight rates climbed and climbed.
Of course, it wasn’t only bad COVID-response policies in the U.S. that contributed to supply chain problems and rising freight rate costs. I’ve gone through this many times in Universal Cargo’s blog over the last couple years, and in great detail. Shrinking carrier competition through alliances, which I’ve been warning for years is a problem that will lead to higher freight rates, contributed to the problem as did other supply chain disruptions like the Ever Given clogging the Suez Canal; however, those factors didn’t impact freight rates nearly to the extent of our own policies.
Ocean Shipping Is Just One of the Glass Windows
Here’s the kicker. Freight rates are merely the shattered glass of the front window.
Printing and spending dollars like they’re Monopoly money devalues our currency across the board (and a deflated dollar also means higher freight rates). Declaring war on American oil and energy, as President Biden has done since entering office, raises gas prices and utilities bills. Those prices didn’t start going up when Russia invaded Ukraine. And President Biden didn’t stop putting in place policies that hurt U.S. oil production after that invasion added more pressure on oil prices. Would that invasion even have happened if Putin hadn’t been emboldened by Biden’s botching of Afghanistan and our president’s weak words basically inviting Russia to execute a “minor incursion” on Ukraine?
Either way, this is not “Putin’s price hike.” A baseball bat has been taken to the windows all around the house. It’s going to take an awful lot of repair work to slow these winds of inflation.
How Much Can OSRA Help Inflation?
Will the OSRA help? I certainly think ocean shipping laws could use reform, but I’m doubtful the OSRA will “solve a big piece of [inflation].”
As Mark Szakonyi writes in a Journal of Commerce article, this shipping reform act that passed the House with strong bipartisan support and is now headed to President Biden’s desk “doesn’t include any language that would rein in the record container rates that have driven historic profits for the industry.”
Szakonyi does acknowledge “OSRA may deter some storage fee billing by requiring carriers to provide more accurate information,” but I don’t see that putting a big dent in shipping costs, certainly not enough to create any noticeable impact on inflation.
After all, high freight rates aren’t the cause of inflation, they’re just part of the inflation our bad policies and out-of-control spending have caused.