One of the first signs that inflation was going to be a problem was the supply chain crisis of 2021.
Remember last year when everyone felt like they had moved out and bought a new office so they could work from home, and the traffic jam at every port meant all those new offices were floating in the ocean , which cannot be delivered for months? The war in Ukraine and the strict COVID-19 lockdowns in China this year have only made matters worse.
Inflation has reached unsustainable levels in many countries, in part due to the continued supply chain nightmare, with some countries even facing political unrest and food shortages.
In the United States, failures in global supply chains are responsible for about half of the current high inflation for four decades June study of the Federal Reserve Bank of San Francisco.
But there are now signs that the pain is coming to an end. The experts said Fortune as supply chains begin to recover, which should help reduce inflation going forward.
Where they differ is how long it will take for the pain to go away.
The long way to go
The New York Federal Reserve maintains what is called the Global Supply Chain Pressure Index (GSCPI), which measures supply chain stresses worldwide. The good news: It’s now down 57% from its December 2021 highs. And while New York Fed researchers said in A declaration Accompanying the index’s latest reading that supply chain pressures “still remain at historically high levels,” the data shows the situation is improving.
According Data from shipping industry research and advisory firm Drewry.
Even though the WCI remains 84% above its five-year average, experts say the decline is proof that global supply chains are beginning a process of normalization as consumer demand begins to weaken.
Lars Jensen, CEO of container shipping industry consultancy Vespucci Maritime, said Fortune that for the past few years the shipping industry has been in the midst of an “extreme state” where capacity could not keep up with demand, but that has started to change in recent months.
“Spot rate levels continue to decline, underscoring that we are indeed in the transition phase to normalcy,” he said. “We are on a slow road to recovery, but it will take time.”
Danish shipping giant Maersk also said in its second quarter report revenue report this week that it expects shipping container shipping rates to gradually normalize from the fourth quarter of this year.
Maersk’s timeline for normalizing shipments, however, could be “a little optimistic,” according to Dawn Tiura, CEO of Sourcing Industry Group, an association of sourcing and procurement professionals. Lower consumer demand is helping to ease pressures on the supply chain, but Tiura noted that there is still a backlog of materials, devices and cars waiting to be shipped to their final destination in ports around the world.
” I think the [shipping] rates will continue to fall,” she said. “But it’s a bit optimistic to think that it will be corrected by the fourth quarter, because of our current situation… I think it will still take until 2023.”
At the Port of Los Angeles, the busiest in the Western Hemisphere, there are signs pandemic-induced congestion is easing, but supply chain issues remain. Port Executive Director Gene Seroka told CNN Tuesday that the shipping backlog in its port fell from a peak of 109 ships waiting at sea to unload in January to just 19 ships on Monday.
However, he also noted in a separate document interview with CBS Monday that contentious contract negotiations with railway unions are causing problems once the ships arrive.
“There are currently around 35,000 rail containers on our docks,” he said. “A normal day is more like 9,000 units.”
Tiura said this is an example of how the recent drop in shipping rates is really just one factor in a much larger global supply chain puzzle.
“That’s the problem with supply chains… There are really so many different chains,” she said. “It’s not just shipping, it’s not just manufacturing, it’s not just trucking or rail, it’s all of the above. And so if you put a knot in a link, it makes them all bend. That’s why I think the fourth quarter is overly optimistic because until we have the right railroads and the dockers have a solid deal, we still don’t know what the future holds.
Redesigning supply chains takes time, and companies need to make sure their new supply chains don’t cause them problems either.
“You need to investigate your supply chain for modern slavery, money laundering and all the different things that could go into it. So a lot of people right now, a lot of CEOs, are saying, “Look, we’re not just going to say, deliver, get it from anywhere, like we did at the start of the pandemic,” Tiura said. . “Now you have to do your research and know exactly who you’re buying from.”
Jensen of Vespucci Maritime also noted that many importers and exporters signed annual freight contracts when prices were high, and most will not be able to renegotiate until the end of this year or even in 2023, which should extend the period. supply chain standardization.
Supply chain relief and inflation
Even when supply chain relief arrives, Nicholas Sly, an economist at the Federal Reserve Bank of Kansas City, who researched effects of supply chains on inflationsaid Americans shouldn’t expect to see a reduction in consumer prices for some time.
“We’re seeing some of the shipping freight rates starting to come down as we’ve unraveled some of the supply chains over the last two months,” he said. Fortune. “One thing I would point out, however, is how long it takes for the drop in ocean freight rates to actually hit businesses, and even how long it takes for it to hit consumers.”
Sly said it could take between a year and 18 months, or even longer, for the effects of the resumption of supply chains to begin to reduce inflation.
“Easing shipping costs may slow some of the price pressures consumers are feeling,” he said. “But, although spot rates are starting to come down, I think businesses and consumers are still feeling, and will continue to feel, the effects of supply chain obstructions for a little while.”
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