A brand new inflation warning for provide chain customers

An Optoro warehouse in Tennessee that handles returns for retailers.

Source: Matt Adams | Optoro

As markets brace for Tuesday’s release of the latest CPI data, logistics executives are warning of a lingering source of inflation in the supply chain and say consumers should be prepared for the impact it will have on their wallets.

While many sources of inflation in the supply chain that have fueled higher commodity prices have fallen sharply – including ocean freight rates and transport fuels – bloated inventories due to a lack of consumer demand are putting continued upward pressure on inventory rates.

“In 2022 we saw rate levels for international air, sea and domestic trucking fall back to earth,” said Brian Bourke, global chief commercial officer at SEKO Logistics. “However, inflationary pressures remain where demand exceeds supply in 2023, including in storage in most parts of the United States, domestic packages and labor.”

One reason for the imbalance between storage supply and demand is the lack of new facilities coming to market.

“National storage capacity remains low and will remain tight for the foreseeable future as US housing starts have declined significantly year over year due to rising interest rates,” said Chris Huwaldt, vice president of solutions at WarehouseQuote.

Consumer prices have fallen sharply as commodity inflation, which had surged during the pandemic, has cooled. And Federal Reserve Chair Jerome Powell expressed confidence after the recent Fed meeting that disinflation “has begun”. December CPI was the smallest year-on-year increase since October 2021, at 6.5% on an annual basis, compared to a peak of 9.1% in June 2022.

The Fed is now more focused on services inflation, particularly labor prices, as it expects pressure on goods inflation to continue its downward trend. But the logistical issues suggest there will be some elements of sticky inflation on the commodity side of the equation.

“The market is starting to feel that the very reassuring disinflation is more complex than we would like,” Mohamed El-Erian, chief economic adviser to Allianz, told CNBC’s “Squawk Box” Monday morning. “The reassuring story was simple: disinflation in goods continues and inflation in services falls, this wonderful concept that Chairman Powell calls core services, no housing comes down, and lo and behold, we don’t have an inflation problem. Now we’re beginning to see that certain commodities are reversing this inflationary process, increasing uncertainty about inflation.

Some shippers keep their products in containers on chassis because of full warehouses and distribution centers, but that means they incur charges that are passed on to the consumer. Shippers are granted an allotted amount of time off during which they are not charged for holding a container, but once those days have expired they are charged daily charges (i.e. late container charges charged for containers out of port).

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Containers left on chassis create two costly problems, said Paul Brashier, vice president of drayage and intermodal at ITS Logistics. It prevents these bogies from being used to move newly arriving containers, which puts additional strain on bogie pools across the US, especially domestic rail ramp pools. Shippers are also charged residential chassis fees – separate from the daily fee that shippers pay per day if the container is not used outside of its free time. “This can result in penalties in the tens of millions,” Brashier said.

He predicts that daily rates will rise in the second and third quarters of this year.

“These are on top of storage fees, which are still at historic highs,” Brashier said. “Delay fees and storage fees are passed on to the consumer, which is why we’re seeing products not falling as much as they should.”

Shipping containers at a container terminal at the Port of Long Beach-Port of Los Angeles complex in Los Angeles, California, April 7, 2021.

Lucy Nicholson | Reuters

According to WarehouseQuote, national storage prices are up 1.4% month-on-month and 10.6% year-on-year.

Many small businesses, which make up the bulk of the US economy numerically but are often the last to benefit from a drop in supply chain prices, tell CNBC they don’t believe inflation has peaked.

For shippers with inventory imbalances, those fees could cost tens of millions of dollars each quarter, Brashier said. Brashier warns that these strains will weigh on earnings in addition to weaker consumer demand.

ITS Logistics advises customers to avoid compromising their bottom line by considering short-term pop-up storage offered by third-party logistics service providers or 3PL and keeping operations on the ground. “This will reduce reliance on storing cargo in sea containers,” Brashier said.

3PL providers include CHRobinsonexpeditors, UPS supply chain solutions, Kuehne + Nagel (America), JB Hunt, XPO logistics, GXO logisticsUber Freight and DHL Supply Chain (North America).

Mark Baxa, president and CEO of the Council of Supply Chain Management Professionals, told CNBC that inflation and higher interest rates are prompting supply chain executives to critically review working capital investments in inventories and operations relative to consumer demand forecasts.

“In the short term, supply chains have moved closer to finance teams to manage cash flow, coupled with greater efforts to manage costs across operations. warehousing and transportation investments,” Baxa said.

One industry facing inflationary headwinds in the supply chain is construction.

Phillip Ross, head of the accounting and auditing practice for Anchin’s architecture and engineering group, said inflation in the supply chain has made it more difficult for companies to manage project completion times.

“In some cases we are looking at six to eight months before materials will be available,” Ross said. “Construction, as one of the largest industries in the United States, is uniquely influenced by the supply chain, which has resulted in contractors not only experiencing delays in their work, but also higher material prices.”

Some inflationary elements stemming from Covid-related supply chain disruptions remain, according to DHL Supply Chain President of Transportation Jim Monkmeyer. These include higher costs associated with diverting containers to East Coast ports, production disruptions and bottlenecks in China and elsewhere, and intermodal restrictions forcing more expensive alternatives such as air freight and express trucks.

Even if the rate of inflation slows, higher consumer prices are expected for a variety of other reasons, contract terms set with suppliers prior to the recent disinflation and the desire of companies to maintain profit margins.

Steve Lamar, CEO of the American Apparel and Footwear Association, tells CNBC that shippers are also finding it harder to bear additional costs as a result of the Trump-Biden tariffs on China. “These tariffs are now $170 billion and are being burned into the cost of goods, leading to higher prices at the checkout,” Lamar said. “The tariffs make it more difficult for companies to absorb further inflationary costs.”

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