April 25, 2022
Inflation continues to build across the country and that includes long-distance freight trucking costs. In fact, with 75% of the goods shipped in this country via trucking, the cost of hauling freight is adding to the overall inflation rate for consumers and there does not seem to be a slowdown in sight.
The situation we are seeing currently in 2022 was caused by an unfortunate series of interrelated events. It started with a global pandemic shut down forcing a shift in how consumers consumed. The demand for goods increased and as the nation and the economy opened up again, the demand accelerated further making the shortages more extreme and having an impact on almost all industries but particularly technology and building supplies like lumber and steel.
The global supply chain brought on by the increased demand created a bottleneck forcing shippers to increase prices based on how they had to respond. Social issues also had an impact. The need for childcare as schools were shut down meant an unanticipated need at home and decreasing workforce causing a labor shortage. And with an already critical shortage of truck drivers, an increase in costs was inevitable. So, now with a sustained increase in overall prices on consumer goods and an increase in shipping and trucking costs, the purchasing power of money has decreased and here we are—inflation.
So, while many consider inflation caused by higher fuel prices, that is only one factor. Based on supply and demand, the increase in fuel prices has added to the cost of the business in trucking which, again, adds to the overall increase in consumer goods. Unfortunately, there is a bigger demand for truckers than there is a supply of them so, that means truckers need to be paid more which also impacts the cost of business and so on and so on.
Demand is exceeding capacity in most modes of transportation by a significant amount,” Donald Broughton, managing partner of Broughton Capital, wrote in the Cass Freight Index Report for May. “In turn, pricing power has erupted in those modes to levels that continue to spark overall inflationary concerns in the broader economy. Transportation Topics
Let’s start by looking at rates vs the cost of business. The cost to haul a full truckload of finished products or materials has increased exponentially. Cass Information Systems’ measure of per-mile rates, excluding fuel charges, jumped 9% in May from a year earlier. According to data from Truckstop.com, per-mile rates for dry vans, temperature-controlled trailers and flatbeds have risen above $2.
Rates are rising because the economy is performing, and consumer spending continues to stretch the capacity of the trucking industry. So, that is good for trucking because it means more income but not great. After all, it does not mean an increased margin. It’s also bad because it means another factor that will be passed onto the consumer but maybe that is a way to decrease demand which is really what we need to level out inflation but we’ll talk about that later.
Tangible factors for the trucking industry include equipment costs which continue to rise. The cost increase for lumber, steel, aluminum, and polyethylene are affecting the trucking industry just like everyone else. The cost of a $30,000 trailer has increased up to $9,000. These tangibles along with wage increases to address the driver shortage are also forcing increased labor costs and budgets to be strained. Staffing costs are also expected to rise with higher minimum wages being implemented across the country. A skilled worker shortage is also forcing wage increases in all areas of the operation. So, while fuel costs are up, so are the cost of labor, insurance, lodging, and food costs.
With rates up between 30-60% higher, transportation costs could remain elevated and that is good for the trucking industry but bad for consumers. What the situation demands is a balance and a sense of getting back to normal. But what does that really mean? If inflation is about supply and demand, which means, in theory, we either need to increase the ability to meet the demand or slow the demand. That is where the federal government comes in by raising interest rates. The theory is that higher interest rates will slow both supply and demand and create a balance.
Higher interest rates will encourage savings. Saving more and spending less is obviously what is needed when too much money is chasing too few goods. If the Federal Reserve were to offer high enough interest rates, excess demand could be reduced enough to stop inflation without forcing the economy into an unnecessary recession. This approach would withdraw money from the economy by offering a return on investment, not by taxation. – American Economic Association
What the feds are banking on is that while increased rates will affect the ability of companies to increase supply, it will, however, provide an opportunity to save by getting a return on the investment. It leads to an approach that will suppress both supply and demand without putting the country into a recession. For now, we will continue to control the things we can and have hope that the things we can’t change will shift and provide the balance.