Economists assess impact of inflation on the freight market

At a time when freight demand remains depressed, coupled with excess truckload capacity and pricing remaining firmly in shippers’ favor, one can point to any number of economic metrics to come up with opinions, or estimations, as to what is driving market conditions.

To be clear, though, the metric leading that list still is very likely inflation, as it has been a major talking point in freight transportation and logistics circles for nearly two years, going back to when the Consumer Price Index (CPI), as measured by the U.S. Bureau of Labor Statistics, for the month of April, saw a 3.4% annual gain, edging down from March’s 3.5% reading. April came in at slightly less than what was expected, there are indications that the Federal Reserve maintains interest rates will remain higher.

While that is a concern, coupled with these readings remaining short of the Fed’s 2% target, it bears repeating that in June 2022, the CPI reading stood at 9.4%, so there has been significant improvement on that front—even if it often still does not feel that way, for various reasons.

That leads to the question of how these mild, yet stubborn, gains in inflation readings are impacting freight levels and activity, both here in the United States and globally.

Matt Muenster, Chief Economist for Green Bay, Wisc.-based Breakthrough, an innovator in transportation management, dedicated to creating transparent and fair strategies for the world’s leading shippers, explained that when looking at April, headline and core inflation did move in the direction that the Federal Reserve would like to see them go, adding that in terms of the outlook, there is still commentary from the Fed that while the CPI is trending in the right direction, it is really maintaining rates into the latter part of the year.

“Based on the Chicago Mercantile Exchange’s FedWatch, September would seem to be the first month that would suggest there could be an interest rate cut, although it is a bit of a mixed response right now, in terms of the Fed dot plot and what members of the FOMC are suggesting would be the target month for a rate cut,” he said. “September or later would be the earliest that would happen.”

As for what this means for the freight market, Muenster observed that it is appropriate that not only are CPI trends are returning to a normal path, coupled with consistent communication from the federal reserve, in terms of wanting to see inflation moderate further before additional rate cuts are made.

“It really means a kind of status quo for the freight market, and that what we have been seeing is a lull, in terms of total tonnage,” he said. “We’ve been trending lower for the better part of two years. When it comes to transportation service providers, they've seen their rates slump and actually remain relatively flat. They've really been in a trough now for about a year, going back to the second quarter of 2023. So, we don't see a lot of momentum for the freight market, both in terms of total tonnage and the rate environment for transportation service providers.”

Conversely—and not unexpected—he said that this has been helpful for shippers, especially as it relates to RFPs and bid season, in that they have been able to gain, for the most part, favorable contracts and be able to lock in modest decreases to their linehaul rates.

“It has been helpful for shippers, and, again, we see more of the status quo going forward,” he said. “We don't see a lot of upward price pressure on to transportation rates through the second half of 2024. While we do expect in the second half of this year, freight volumes will increase annually, those annual increases are happening off of 2023 freight volumes, which were already down considerably from 2022 volumes. There's a base that we need to consider just as much as the statistic. But largely speaking, what we gather from the CPI is that the market is what we have come to expect, in terms of what it means for freight movements and that's been a lull.”

To that end, Muenster acknowledged that inflation has been stickier than the Federal Reserve’s initial estimates and projections.

And on a more positive note, he said that wage growth has been very good, with gains in real wages in excess of inflation that are helping consumer spending remain relatively resilient. He added that even though consumer spending slumped beneath the longer-term trend over the course of the last year, it has been relatively resilient in recent months.

“Wage growth has been a factor into what we are experiencing with inflation,” he said. “It suggests we have a relatively tight labor market, which means costs for laborers has been relatively high. Other things related to inflation, like high housing costs, are a factor. Transportation services costs have remained relatively high, with insurance being a part of that. These are things that are not easily done away with and have been a factor in the CPI remaining higher for longer. Ultimately, it has been a factor in not having rate cuts yet and ultimately, yet again, is a consequence and relates to the experience we're having in the freight market.”

Looking ahead, Muenster said it is likely going to be a while for rate cuts to be made, with the earliest it could occur likely to be around the end of the third quarter or beginning of the fourth quarter, and will be relatively slow.

“I would hazard a guess of 25 basis points or 50 basis points is not going to bring down the rate rapidly,” he said. “It is going to be a slow moderation going out well into 2025. Our expectations about what rate cuts really mean for the total movement of freight are that there is not going to be some sort of swift turnaround in freight volumes. It is going to be relatively gradual over time, if we keep the labor market relatively healthy.”

Walter Kemmsies, president of The Kemmsies Group, a provider of industrial and logistics real estate brokerage and consulting services, explained that the high inflation readings seen during and coming out of the pandemic came during a period of high demand for goods, with not a lot of capacity to move and deliver goods.

“The problem with the Federal Reserve and economists in Washington in general, is they don't understand the nature of the economy,” he said. “Inflation can be pushed up by demand-pull, with a lot of consumers suddenly buying a lot more stuff that pushes prices up. And it can also be caused by a decline in supply. The price system that governs the economy is driven by supply and demand. Freight movement is a huge part of the supply part. But in Washington and other parts of the country. Transportation is invisible, like electricity. Nobody notices until the power is out, and that is the problem.”

As for the Federal Reserve hitting its desired 2% inflation goal, Kemmsies said it is not realistic at the moment, due to a shortage of workers, and is not something that can be fixed by the Federal Reserve raising rates. And as companies start sourcing from places other than China, he said they will see higher costs.

The reason for that, according to Kemmsies, is that doing business in China is cheaper and switching to other regions is more expensive.

“Companies will pay higher import costs, which will be passed on to the U.S. consumer, meaning inflation will remain higher for longer,” he said.