Today, the United States and other countries all over the world are experiencing massive inflation. Since March 2020, when the covid crisis began, financial markets around the globe have taken a huge hit. Sadly, inflation affects every aspect of our lives, including all commodities, and the shipping and logistics industry has certainly been impacted. In fact, freight prices have been impacted for quite a while now. The effects of soaring commodity prices combined with high freight rates have made it very challenging for businesses in the shipping and logistics industry to remain profitable.
How Does Inflation Affect Shipping?
Why does Inflation Happen?
Inflation refers to increasing consumer prices in an economy. The increasing costs of even the most basic essentials, such as groceries, can have devastating, long-lasting effects on consumers. Not only are prices higher when inflation occurs, but consumer purchasing power decreases as well. This double-whammy effect can spell disaster because when inflation is high, your dollars can buy fewer and fewer goods and services.
Types of Inflation
Demand-pull
This form of inflation occurs when there’s more money in the economy than there are goods and services. When people are earning more money and want to spend that money on available products, demand-pull inflation occurs.
Cost-push
When the cost of producing products increases, cost-push inflation occurs. To illustrate, if the price of crude oil goes up, gas prices go up, and in turn, transportation costs increase. Cost-push inflation can result in higher prices on many of the items that line store shelves.
Structural
When there’s an imbalance in the economy, it’s known as structural inflation. When there’s an increased demand for workers in a specific industry and wages go up, this type of inflation can occur.
How Inflation Affects the Cost of Commodities
Inflation has a direct impact on the cost of commodities. For instance, when shipping prices and logistics costs rise, commodity prices will go up, too. Companies will need to take these price increases into account when they’re setting the prices of their products.
Additionally, inflation can lead to increased interest rates. Increased interest rates make it more costly for companies to borrow funds they may need to purchase additional products, or to expand their business, for example. In this instance, inflation can have an indirect impact on commodity prices, as it becomes more expensive for companies to manufacture the goods they produce.
How Inflation Affects Consumers
Increased prices can further increase inflation. This can result in higher interest rates, as well as an overall decrease in consumers’ purchasing power. In other words, the cost of goods can further increase, and at the same time, the dollar can purchase less.
How Inflation Affects Shipping and Logistics
All industries are affected by inflation, including shipping and logistics. There are a number of ways in which this industry is negatively impacted by inflation. The most direct impact is via the increased rate of goods. When crude oil prices go up, the cost of fuel goes up as well. As a result, the costs of shipping goods go up, too. These increased costs have a ripple effect and will lead to even higher prices on consumer products.
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