MNI: Trade Kinks Put Price Surge On Longer Path-Supply Experts

A string of fresh shocks hitting supply chains are pushing back estimates for how long their detrimental effects will linger, supply chain experts and a Kansas City Fed economist told MNI, helping to explain why the Federal Reserve has ditched its previous patient stance where officials hoped supply chain kinks would soon straighten out.

Jonathan Gold, vice president of supply chain and customs policy at the National Retail Federation, said he's expecting supply chain disruptions throughout 2022.

"There are a lot of factors that go into that - ongoing strong consumer demand certainly continues to put stress on the supply chain as retailers but there are now shutdowns in China and the Ukraine situation now too," he said. "The system has been stressed for the better part of 18-plus months and that stress is going to continue."

Nicholas Sly, a Kansas City Fed economist who has studied shipping costs and inflation, told MNI he sees reason to believe there may be more pass-through of shipping costs to consumers than in the past. His research shows that for every 15% increase in shipping prices, core inflation increased by 0.10%.

"As we've gotten more and more information it looks like the lag should potentially get a little bit longer between 12 months and 18 months for those costs to really fully reach consumers," Sly said. "That means that those are still cost run-ups that are they're still working their way in through to consumers."

In the context of a 137% increase in shipping costs from October 2019 to October 2021, and with the Harper Peterson Charter Rate Index up over 300% since a year ago, prices should continues to feed through to consumers, said Sly, still hopeful that demand pressures will moderate in the near-term.

WAREHOUSE SPACE

While port congestion has eased slightly with the number of ships queued off of Southern California down from previous highs, with hopes that backlogs could see improvement at the Port of Los Angeles, sources said other signs of underlying stresses have only worsened.

"You clearly, clearly have to get the warehouse situation under control," said John Martin, an expert on terminal congestion who has served as an outside adviser during the pandemic to the Pacific Maritime Association, which represents shippers. "The vacancy availability of industrial warehouse space in Los Angeles and in Southern California is now below 1% which is significant and has only worsened from already low rates in prior months."

Fed Chair Powell earlier this week changed his stance and said the Fed will be looking to actual progress on these issues and no longer assuming significant near term supply-side relief. Both Cleveland Fed President Loretta Mester and Minneapolis Fed President Neel Kashkari this week described supply chain problems as "whack-a-mole," with firms seeing continuously shifting strains in sourcing products that will "maybe" get better in 2023.

LABOR DISPUTE

Another lingering uncertainty are negotiations between West Coast port workers and leaders at 29 West Coast ports on a new labor contract that is currently set for a June 30 deadline. Last week, Port of Los Angeles Executive Director Gene Seroka said he expects those negotiations between the ILWU and the PMA to extend beyond the contract expiration.

"Many importers are already expecting disruptions," said Christopher Tang, an expert on supply chain management who has consulted for Amazon, IBM, Hewlett Packard and the Fed, about the negotiations.