A shortage of empty containers and congestion at ports has led to a tripling of the price of moving a container from China to the US over the past eight weeks. The rise in shipping costs raises a spectre of so-called “cost push inflation” for advanced economies. It is not clear, yet, how much the pandemic has damaged the capacity of the economy to produce goods and services. If more normal activity resumes after vaccination schemes the increase in overall demand could swiftly outpace diminished supply. Stagflation — high unemployment combined with rising prices — would be a nightmare scenario for central banks having to make policy for heavily indebted economies.
Shipping costs are a notoriously volatile economic indicator. It takes years to build a container ship, so when demand is high there is little prospect of bringing more on stream: that means prices rocket. If demand is low there is not much else a vessel can be used for, so prices swiftly collapse thanks to the excess capacity. Empty containers were left stranded in Europe and the US during the first set of lockdowns, but now ports cannot handle the volume of trade.
Worryingly, increases in costs are not limited to shipping. Car manufacturers have similarly been caught short by an unexpected surge in demand at the end of last year and bottlenecks in semiconductor supplies have forced factory closures. Liquid natural gas prices reached a record earlier this month, partly due to a cold snap. Other commodity prices too, are surging; metals prices have risen rapidly because of mine closures in Africa and South America and rising Chinese industrial production. Wheat, soyabean, rice, and corn prices are higher too: shipping costs, weather and Covid-related stockpiling have all played their part.
Overreacting to a transitory surge in inflation would be a mistake, however. Consumer prices similarly spiked during the 2008 financial crisis thanks to a commodity boom — a contributing factor to a wave of protests in the Arab world. The increase swiftly faded and was not incorporated into long-term expectations. Not did it prompt any increase in the price of the most important input to production: labour. The European Central Bank’s two successive increases in interest rates in 2011, an attempt to forestall inflation, have gone down in the annals of monetary policy as a hubristic mistake.
Central banks should be vigilant that price expectations remain under control. Lessons from previous business cycles may not apply: efforts to build “resilience” into supply chains may be worthwhile but they will also raise the costs of doing business. Some kinds of economic activity are likely to have to operate under constraints for the short term at least. Protectionism and trade tensions, too, can raise costs, as many British businesses have experienced since the end of the Brexit transition period.
There is a transatlantic divide too. While the ECB, which announces its latest interest rate decision on Thursday, is facing another month of deflation and the added challenge of a surging euro, dollar weakness will only amplify the inflationary pressures in the US. Communications by the Federal Reserve have also suggested the US central bank has become more tolerant of inflation; implied predictions of inflation in options prices, an admittedly imperfect measure of expectations, have diverged on either side of the Atlantic. For the moment, however, this should merit nothing more than a particularly sharp reminder that the Fed has not abandoned price stability as a goal altogether.