Ukraine conflict will heighten supply chain risks and drive inflation: IMF

The global supply chain crunch that came with Covid-19 and has more recently been exacerbated by Russia’s invasion of Ukraine will be prolonged by continued high shipping costs caused by the conflict, according to the International Monetary Fund (IMF). “Analysis suggests the inflationary impact of shipping costs will continue to build through the end of 2022. This will create complicated trade-offs for many central bankers facing increasing inflation and still ample slack in economic activity. Moreover, the war in Ukraine is likely to cause further disruptions to supply chains, which could keep global shipping costs – and their inflationary effects – higher for longer,” concluded the IMF in a recent note. The sea carries more than 80% of the world’s traded goods, most of which sail inside 40-foot-long steel containers stacked by the thousands atop some of the largest vessels ever built. The shock of the pandemic underscored just how crucial the maritime container trade is to the global economy, pointed out the IMF. “From Shanghai to Rotterdam to Los Angeles, the coronavirus upended supply chains. Ports lacked workers who were home sick. Truck drivers and ship crews couldn’t cross borders because of public health restrictions. Pent-up demand from huge stimulus programs during extended lockdowns overwhelmed the capacity of supply chains. Besides causing delays in getting goods to customers, the cost of getting them there surged,” it explained. The result was that the cost of shipping a container on the world’s transoceanic trade routes increased seven-fold in the 18 months following March 2020, while the cost of shipping bulk commodities spiked even more. The IMF’s latest research shows that the inflationary impact of those higher costs is poised to keep building through the end of this year. “Our analysis predates the war in Ukraine but isn’t isolated from it – the conflict will likely exacerbate global inflation,” said the IMF. Based on data from 143 countries during the past 30 years, the IMF found that shipping costs are an important driver of inflation around the world: when freight rates double, inflation picks up by about 0.7 percentage points. The effects are quite persistent, peaking after a year and lasting up to 18 months. This implies that the increase in shipping costs observed in 2021 could increase inflation by about 1.5 percentage points in 2022, said the IMF. Clearly, countries that import more of what they consume see larger increases in inflation, as do those that are more integrated into global supply chains. Similarly, countries that typically pay higher freight costs – landlocked countries, low-income countries and especially island states – see more inflation when these rise. A “strong and credible” monetary policy framework can play a role in mitigating the second-round effects from import prices and inflation. “Our analysis shows that keeping inflation expectations well anchored is key to containing the effect of soaring shipping costs on consumer prices, particularly core measures that exclude fuel and food,” concluded the IMF.

Ukraine conflict will heighten supply chain risks and drive inflation: IMF

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