An Optoro warehouse in Tennessee that handles returns for retailers.
Source: Matt Adams | Optoro
As the markets prepare for the latest consumer price index data on Tuesday, logistics managers are warning of a persistent source of inflation in the supply chain, and saying consumers should be ready for the impact it will have on their wallets. While many sources of supply chain inflation that stoked higher goods prices have come down sharply, including ocean freight rates and transportation fuels, bloated inventories due to a lack of consumer demand are sustaining upward pressure on warehouse rates.
“In 2022, we saw rate levels for international air and ocean and domestic trucking fall back down to Earth,” said Brian Bourke, global chief commercial officer at SEKO Logistics. “But inflationary pressures remain where demand outpaces supply in 2023, including in warehousing through most of the United States, domestic parcel and labor.”
One reason for the imbalance between warehouse supply and demand is lack of new facilities coming into the market.
“National warehousing capacity remains low and will remain tight for the foreseeable future as U.S. industrial construction starts have fallen considerably year-over-year due to rising interest rates,” said Chris Huwaldt, vice president of solutions at WarehouseQuote.
Consumer prices have come down sharply as goods inflation which surged during the pandemic has cooled, leading Federal Reserve Chair Jerome Powell to express confidence after its most recent FOMC meeting that “disinflation has begun.” December’s CPI was the smallest year-over-year increase since October 2021, at 6.5% on an annual basis, down from a 9.1% peak in June 2022.
The Fed is now more focused on services inflation, in particular labor prices, as it expects the pressure in goods inflation to remain downward. But the logistics issues suggest that there will be some elements of sticky inflation on the goods side of the equation.
Full warehouses and distribution centers have some shippers holding their products in containers on chassis, but this has them incurring charges which are passed on to the consumer. Shippers are given an allotted amount of free time during which they are not charged for holding a container, but once those days expire, per diem charges (late container charges that are charged for containers out of port) start to be charged.
Containers left on chassis create two costly problems, said Paul Brashier, vice president of drayage and intermodal for ITS Logistics. It prevents those chassis from being used to move newly arriving containers, putting additional stress on chassis pools throughout the U.S., especially inland rail ramp pools. Shippers will also be charged fees for the dwelling chassis — separate from the per diem charge shippers pay per day once the container is out of use beyond its free time. “This can lead to tens of millions of dollars in penalties,” Brashier said.
He predicts that per diem charges are going to surge in the second and third quarters of this year.
“These are on top of charges for warehousing which are still at historic highs,” Brashier said. “Late fees and warehouse fees are passed onto the consumer, which is why we are not seeing products fall as much as they should.”
National storage pricing is up 1.4 percent month-over-month and 10.6 percent year-over-year, according to WarehouseQuote.
Many small businesses, which represent the largest share of the U.S. economy in number but are often the last to benefit from a decline in supply chain pricing, tell CNBC they do not believe inflation has peaked.
For shippers with inventory imbalances, Brashier says these charges could cost shippers tens of millions of dollars per quarter. Brashier warns these charges, on top of weaker consumer demand will ripple through earnings.
ITS Logistics is advising clients to avoid a hit to their bottom line by considering short-term, pop-up storage offered by third-party logistics providers (3PL) and grounding operations. “This will reduce reliance on storing freight in ocean containers,” Brashier said.
3PL providers include CH Robinson, Expeditors, UPS Supply Chain Solutions, Kuehne + Nagel (Americas), J.B. Hunt, XPO Logistics, GXO Logistics, Uber Freight, and DHL Supply Chain (North America).
Mark Baxa, president and CEO of the Council of Supply Chain Management Professionals, tells CNBC inflation and higher interest rates are driving supply chain leaders to critically examine working capital investments in inventory and operations in relation to consumer demand forecasts.
“In the short run, supply chains have moved closer to finance teams to manage cash flow, coupled with greater efforts to manage costs across operations. Considerations have moved to close-in review and total cost management across the business, including people, technology, warehousing, and transportation investments,” said Baxa.
One industry facing supply chain inflationary headwinds is construction.
Phillip Ross, accounting and audit practice leader of Anchin’s architecture & engineering group, says supply chain inflation has made it more difficult for companies to manage completion times for projects.
“In some cases, we are looking at six to eight months before materials will be available,” Ross said. “Construction, as one of the largest industries in the U.S., is uniquely impacted by the supply chain, which led to construction companies experiencing not only delays in their work but also increased prices for materials.”
Even with the rate of inflation slowing, higher consumer prices are expected to remain for a variety of reasons, from contract terms set with suppliers before recent disinflation and company desire to maintain profit margins.
Steve Lamar, CEO of the American Apparel and Footwear Association, tells CNBC shippers are also finding it harder to absorb extra costs as a result of the Trump-Biden tariffs on China. “These tariffs are now hitting $170 billion and are baked into the cost of goods and hence higher prices at the register. The tariffs make it harder for companies to absorb other inflationary costs.”