The 2021 surge in global shipping costs was a canary in the coal mine for the persistent rise in inflation

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The 2021 surge in global shipping costs was a canary in the coal mine for the persistent rise in inflation

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Bibliographic details

• Authors: JONATHAN D OSTRY
• Published: January 24, 2023

Context and thesis

• Author: JONATHAN D. OSTRY, professor of the practice of economics at Georgetown University and former acting director of the IMF’s Asia and Pacific department.
• Publication date: January 24, 2023.
• Central argument: A rapid, large increase in global shipping costs in 2021 was an observable and powerful driver of persistent inflation that was underappreciated by major forecasters and policymakers in 2021.

Key empirical findings

• By October 2021, indicators of the cost of shipping containers by maritime freight had increased by over 600 percent from their pre-pandemic levels.
• By October 2021, the cost of shipping bulk commodities by sea had more than tripled.
• Estimated macro effect: a doubling of shipping costs causes inflation to increase by roughly 0.7 percentage point.
• Given the actual increase in global shipping costs during 2021, the study estimates the impact on inflation in 2022 was more than 2 percentage points.
• Persistence: the shipping-cost shock’s effect on inflation peaks after about a year and lasts up to 18 months.
• Comparison with oil: the impact of global oil prices on consumer price inflation peaks after only two months.
• Heterogeneity: the inflationary transmission of shipping-cost shocks is about double the average for remote small-island states in the Pacific and the Caribbean.

Analysis of forecasting and policy misreading

• In the second half of 2021, the Federal Reserve described the surge in consumer price inflation as “transitory” and expected returns to a 2 percent target in 2022.
• The IMF’s (then) chief economist described inflationary surge in similar transitory terms and did not highlight overheating or persistence in 2021 updates.
• The IMF’s World Economic Outlook (spring 2022) revealed that the institution’s inflation projections were off by a factor of more than 3 for advanced economies and 2 for all other countries.
• Some unforeseeable factors in 2021 (China’s zero-COVID policy supply disruptions, Russia’s invasion of Ukraine, unwinding of pandemic-era savings) partially explain forecasting errors; however, known drivers—like the surge in shipping costs—were overlooked and should have been given more weight.

Implications and policy recommendations

• Central banks and policymakers should treat shipping-cost shocks as meaningful early warning indicators of enduring inflationary pressures.
• Countries with less-anchored inflation expectations and weaker monetary policy frameworks are likely to experience larger and more persistent inflationary effects from shipping-cost shocks.
• Lower-income countries and some emerging market economies are more at risk than advanced economies with established price stability credentials.
• Remote small-island states face amplified risks, including a greater chance of wage-price spirals; such countries may need to tighten monetary policy preemptively when shipping costs surge.
• The symmetric nature of estimates implies that declines in shipping costs should help bring inflation down in the following year, consistent with observed big moderation in shipping costs in 2022 contributing to a reversal of inflationary pressures.

Research note

• Related study citation provided in the article: Carrière-Swallow, Y., P. Deb, D. Furceri, D. Jiménez, and J. D. Ostry. 2023. “Shipping Costs and Inflation.” Journal of International Money and Finance 130 (February).

Source: The 2021 surge in global shipping costs was a canary in the coal mine for the persistent rise in inflation — F&D Magazine, January 24, 2023.