It’s Beginning to Look a Lot Like… Inflation Is Here to Stay

Santa Claus may not be as jolly when he comes to town this holiday season.

If the man in the red suit is facing the same supply constraints and rising costs as the rest of the world, there’s a good chance his workshop isn’t churning out toys at its standard rapid clip this time of year. Retailers, unfortunately, will be hard-pressed to pick up the slack, and those that can will pass on the rising costs they incur to consumers.

The reality is that containerships have to wait several days—even weeks! —to unload their cargo at two of the busiest ports in the U.S., the ports of Los Angeles and Long Beach. Volume has surged more than 30% at the Port of Los Angeles this year, and containerships are waiting anywhere from six to eight days to unload. As a result, the West Coast ports have been congested, with 62 ships reported as anchored off the coast of California at the end of September.[1]

The port congestion isn’t expected to abate any time soon either, especially as holiday demand keeps container volumes strong. In August, an estimated 2.37 million imported containers passed through major U.S. ports. That represents the largest number in nearly two decades. The National Retail Federation now anticipates that 25.9 million containers will pass through U.S. ports this year.[2]

Port congestion, though, is only half of the supply constraint story. Yes, rising consumer demand in the wake of the global pandemic created a surge in shipping volumes. But a lack of dockworkers, truck drivers, and warehouse workers exacerbated the situation at the major shipping ports in the U.S.—and around the world for that matter.

Once containers are unloaded from ships, many remain stacked in terminals. The fact is that railways can only haul off a set number of boxes at a time, and many warehouses have breached capacity. As a result, containers awaiting transfer to warehouses, or to be unloaded, often stay stacked at the docks for more than eight days—and those waiting to leave on a train can sit for nearly 12 days.[1]

One of the most significant consequences of port bottlenecks is rising costs.

According to Oxford Economics, shipping containers from Asia and Europe to the U.S. has skyrocketed this year. Costs have more than doubled—and even tripled—in the past five months alone! For example, the price to ship a container from China to the West Coast ports in the U.S. has surged 210% since May.[2]

Most executives at the U.S. ports don’t anticipate the congestion to ease up after the holiday surge either. Many are projecting the port bottlenecks will continue well into 2022—if not persist for all of 2022. This means that the cost to ship containers won’t diminish either, and these costs will continue to be passed on to retailers and ultimately consumers.

The Personal Consumption Expenditures (PCE) index, or the Federal Reserve’s favorite inflation indicator, is already sitting at a three-decade high. Due partly to port bottlenecks and subsequent supply constraints, core PCE (which excludes food and energy) rose 0.3% in August, and it is now up 3.6% year-over-year.[1] You may recall that the Fed’s inflation target is 2%.

The Fed has repeatedly stated that inflation is “transitory,” but inflation is likely to remain elevated as long as the port bottlenecks persist. At the most recent Federal Open Market Committee (FOMC) meeting, the Fed did admit that inflation will likely come in at 3.7% in 2021 and then taper off in 2022 to about 2.3%.

In the meantime, though, prices are set to remain high, as several retailers take matters into their own hands to try to circumvent port bottlenecks.

Costco (COST), Home Depot (HD), Target (TGT), and Walmart (WMT) have all chartered entire ships to haul consumer goods across the oceans. While each of these companies has deep pockets, the cost to charter a ship doesn’t come cheap: It is estimated to cost anywhere between $1.0 million and $2.0 million per month to charter a vessel. And that doesn’t include the costs to rent containers, which can cost upwards of $10,000 per container.[2]

By chartering their own ships, Costco, Home Depot, Target, and Walmart can dictate where the ships come to port and avoid delays at the busiest ports like Los Angeles and Long Beach. This move is helping the retail giants secure much-needed consumer goods to restock their shelves ahead of the holiday shopping season, but it’s coming with a high price tag. A price tag that consumers will likely be paying for in the coming weeks and months.

What does more persistent inflation mean to the markets? It most certainly adds an element of risk that should be part of the planning and management process.

If you would like to discuss how inflation may impact your future financial plans, please give me a call to discuss. I would enjoy hearing from you.

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[1] https://finance.yahoo.com/news/perfect-storm-supply-chain-issues-124620280.html

[2] https://www.wsj.com/articles/u-s-ports-see-shipping-logjams-likely-extending-far-into-2022-11630843202

[3] https://www.reuters.com/world/us/record-60-cargo-ships-wait-unload-busiest-us-port-complex-2021-09-15/

[4] https://finance.yahoo.com/news/perfect-storm-supply-chain-issues-124620280.html

[5] https://www.cnbc.com/2021/10/01/key-inflation-gauge-watched-by-the-federal-reserve-hits-another-30-year-high.html

[6] https://www.marketwatch.com/story/walmart-target-home-depot-and-other-large-retailers-are-chartering-ships-to-bypass-supply-chain-problems-will-the-strategy-save-christmas-11633455167