As economies around the world grapple with the highest inflation in decades, attention is focused on understanding the causes (e.g. Ilzetzki 2022 for the UK, Ha et al. 2021 for the global level). Our research estimates the impact of the surging cost of shipping goods by sea (Carrière-Swallow et al. 2022). Between October 2020 and October 2021, the cost of shipping containers by maritime freight rose by over 600% (Figure 1). This reflected many factors, including strong demand for final and intermediate goods, and constrained shipping capacity due to logistical bottlenecks – some related to pandemic disruptions – and shortages in container shipping equipment. The rise in shipping costs led to sharp increases in the price of imported goods at the dock, the more so in small, highly open countries (including in the Pacific and the Caribbean).
Figure 1 Recent rise in global ocean freight costs
Source: Bloomberg LP and IMF staff calculations.
While freight costs have long been recognised to be an important determinant of the patterns of trade (Anderson and van Wincoop 2004, Hummels, 2007, Brancaccio et al. 2020), their impact on consumer prices has received limited attention in the literature.
In our paper, we estimate the pass-through from global shipping costs to inflation in a large sample of 46 economies. We find that when global shipping costs double, headline CPI inflation increases by about 0.7 percentage points. Given how volatile shipping costs are in the data, this result is economically significant. Indeed, a one standard deviation increase in shipping costs has a similar inflationary impact to a one standard deviation increase in global oil or food prices, but the impact of shipping costs on inflation is more persistent. The actual surge in global shipping costs seen during 2021 added about 2 percentage points to global inflation in 2022.
Figure 2 Response of headline inflation following increase in shipping costs
Source: Authors’ calculations.
Transmission to retail prices
When shipping costs rise, the local-currency price of imported goods goes up almost immediately, with 90% of the increase transmitted within two months. After a further two months, the shipping-cost shock is passed through to local producer prices. The rise in consumer prices, however, is more gradual and protracted, reflecting transmission through the domestic supply chain by importers, producers, intermediaries, and eventually retailers.
The result is that the impact of higher shipping costs on headline inflation peaks after about 12 months, and fades thereafter. We compare these pass-through estimates to those from global oil or food prices. Increases in global oil prices lead to a swift rise in headline consumer price inflation, with a peak effect after only two months. Increases in global food prices raise headline inflation a bit more gradually, with an impact that peaks after about seven months. Shipping cost shocks, therefore, generate more persistent effects on headline inflation than shocks to oil and food prices. With all the discussion in 2021 about whether the inflationary shock was likely to be transitory or not, a greater focus on the shipping-cost angle could have acted as a canary in the inflation coal mine, warning about persistent inflationary pressure (Ostry 2022).
Identification using Suez Canal closures
To ensure that our reduced-form estimates are not driven by swings in global demand, we undertake an instrumental variables (IV) estimation using closures of the Suez Canal as the instrument. The four blockages of the canal in our sample are related to ship captain errors or to weather events, and are thus plausibly exogenous to global demand conditions. They are also relevant instruments, because approximately 30% of global container traffic transits through the Canal, and alternative sailing routes are costly, adding thousands of miles and weeks of delays to itineraries. The IV estimation results confirm the size of the responses of core and headline inflation, as well as producer and import prices, following a rise in global shipping costs provoked by a disruption of this nature, and suggest even more persistent impacts than the baseline estimates.
Cross-country heterogeneity and role of country characteristics
The impact of shipping costs on inflation is widespread but heterogeneous across countries. To probe this heterogeneity, we consider an augmented sample of 143 economies. Lower-income countries tend to experience larger increases in inflation than emerging-market or advanced economies. Island states are most affected, suffering an increase in inflation that is twice as large as the baseline panel estimate.
We also estimate specifications that interact the shipping price shock with a number of relevant country characteristics. We focus on three factors: the share of imports in domestic consumption, the degree of integration into global supply chains, and the strength of the monetary policy framework. In all cases, we find that these factors are important determinants of the heterogeneous response of headline inflation, with important policy implications given that in countries with less anchored inflationary expectations and weaker monetary policy frameworks, inflationary impacts of surging shipping costs are likely to be larger and more persistent. Given the likely size of the inflationary impact identified in our study, we conclude that monetary policy setters would be well-advised to consider these shocks in evaluating how much and when to adjust policy to avoid being behind the curve should global events once again contribute to a surge in shipping costs.
Authors’ note: The views expressed in this column should not be ascribed to the institutions with which the authors are affiliated.
Anderson, J and E van Wincoop (2004), “Trade Costs,” Journal of Economic Literature XLII: 691-751.
Brancaccio, G, M Kalouptsidi, and T Papageorgiou (2020), “Geography, Transportation, and Endogenous Trade Costs,” Econometrica 88(2): 657-691.
Carrière-Swallow, Y, P Deb, D Furceri, D Jiménez, and J B Ostry (2022), “Shipping Costs and Inflation”, CEPR Discussion Paper 17259.
Ha, J, M A Kose, and F Ohnsorge (2021), “Inflation pressures: Likely temporary but challenging for policy design,” VoxEU.org, 14 July.
Herriford, T, E M Johnson, N Sly and A L Smith (2016), “How Does a Rise in International Shipping Costs Affect U.S. Inflation?”, Macro Bulletin, Federal Reserve Bank of Kansas City.
Hummels, D (2007), “Transport Costs and International Trade in the Second Era of Globalization,” Journal of Economic Perspectives 21(3): 131-154.
Ilzetzki, E (2022), “Surging inflation in the UK,” VoxEU.org, 10 February.
Ostry, J D (2022), “The Canary in the Inflation Coal Mine,” Project Syndicate, 5 October.
Rubinton, H and M Isaacson (2022), “Inflation and Shipping Costs,” Economic Synopses 5, Federal Reserve Bank of St. Louis.