There was a lot of talk about inflation in the last six months – and for good reason. Inflation has a major impact on rising food prices and energy costs. Although the overall situation is complex, fuel pricing is one of the many factors contributing to the increase in sea freight rates, inland and around the world – a seven-fold increase from the average before Covid 19. In the past two years, the logistics industry has been damaged by supply and demand gaps, low reliability, congestion at global ports, labor shortages and capacity constraints.
Despite the fact that inflation will continue to affect freight rates and freight rates will continue to affect inflation, there is a positive forecast for pressure easing in the near future – although not to the levels seen before Corona virus.
So what is behind the global inflation trend? It is impossible to link it to a single event or case, but to a large number of factors that together create a phenomenon of financial turmoil; Post-corona economic policies, fluctuations in consumer demand, supply chain bottle logs, freight rates, food shortages and rising energy prices all contribute to inflation around the world, with the war in Ukraine serving as a trigger for much of the crisis.
Energy costs are on the rise
Europe has become heavily dependent on Russian gas over the past decade, importing up to 40% of its natural supply by 2021. The main Russian gas importers are Germany, Italy, the Netherlands, and France, and Germany alone imported about 55% of its gas from Russia last year. In the past year, Russia has dramatically reduced its gas supply to Europe by about 88%. This has caused the wholesale price of gas to jump up to 210% across the continent.
Energy prices are one of the biggest drivers of inflation, since they have a butterfly effect on global economies and within society itself.Over the past decade, Europe has become heavily dependent on gas from Russia, importing up to 40% of its natural supply by 2021. The main Russian gas importers are Germany, Italy, the Netherlands, and France, and Germany alone imported about 55% of its gas from Russia last year.
In the past year, Russia has dramatically reduced its gas supply to Europe by about 88%. This has caused the wholesale price of gas to jump up to 210% across the continent. As a result of the butterfly effect that occurs in global economies and within societies, energy prices have been a major driver of inflation.
First, we often see monetary policy tightening by government organizations such as raising interest rates, which results in higher credit costs for businesses and individuals. Second, and most obviously, we see energy costs in households and businesses rising to extreme levels in some cases. In the UK, for example, household gas and electricity bills have jumped by about 80%! However, a sense of uncertainty and insecurity is reflected within society, which leads to changes in our behavior and the way we spend our money.
The need to spend on luxuries decreases as the focus on household expenses increases. And the less we spend, the more the economy suffers. eCommerce is one of many areas affected by the change in the context of consumer spending, having grown to new heights during the pandemic. What this means in the world of logistics is that warehouses are filled with stock that businesses fail to sell. This stock is then replaced with all-new stock. As a result, containers of stock accumulate in ports and terminals across Europe, resulting in high customs fees.
The price of food just blew out of proportion
One of the most prominent inflation problems for the average consumer is the increase in food prices, which is the second highest inflated sector in September 2022 with an increase of about 15.4% – and of course the war in Ukraine has a significant part in this phenomenon. In fact, since the outbreak of the Ukraine-Russia war, exports of grain, wheat and seeds from Ukraine to the world have decreased, while at the same time government sanctions imposed against Russia have thrown the global food supply chain out of balance. Reduced export availability means that the prices of food production (and subsequently what we see on supermarket shelves) have increased exponentially and dramatically.
Oil is approaching record levels
The price of oil is another area that has drastically affected inflation and consumer spending in the economy in recent months. Crude oil reached the highs of $123.21 per barrel in 2022. During Corona, the price of crude oil dropped considerably when at the same time businesses were closed and people’s mobility was reduced, reducing energy consumption requirements. However, when we returned to normal and demand increased, suppliers struggled to keep up and prices rose.
Also, the drop in the value of the dollar played a significant part in inflation because the oil used to produce fuel is priced in dollars. In practice, a weaker local currency makes fuel more expensive. Elsewhere, sanctions against Russia have led to a ban on imports of Russian oil, raising demand and prices for other producers. EU figures show that Russia supplied 25.9% of the EU’s oil in 2021 – and in the second quarter of 2022, that share was just 16.7%. The price of fuel is one of the many factors contributing to the increase in ocean and inland freight rates around the world – a sevenfold increase over pre-pandemic average levels.
The effects of inflation on the supply chain
As a result of inflation, producers may demand fewer goods or services. With the support of all stakeholders in the supply chain, including sales and marketing teams, warehouses and logistics teams, sales and operations processes need to be more focused, detailed and agile. When there is a reduction in supply, some companies are forced to raise their prices, leading to inflation. Despite recent improvements in air freight times, consumer prices have not eased. It is expected that inflation will return to the 2% target in about two years. Prices may slow down if this occurs, but higher costs may persist.
Logistics and supply chain professionals believe inflation has adversely affected their businesses. These impacts include capacity constraints as well as rate and price increases, supply chain instability, longer delivery times, delayed package delivery and ongoing problems with shipping containers.
As a result of supply and demand gaps, low reliability, global port congestion, labor shortages, capacity constraints, and more, logistics rates have blown out of proportion over the last few years. Although inflation will continue to affect freight rates in the short term, prices will eventually balance out, although not to levels seen before Covid 19. This is because inflation affects operational costs.
Adapting to the new reality requires organizations to act now. During inflation, prices rise in the economy at a rapid pace. Inflation in the supply chain can affect prices, causing the supply chain to increase costs, which increases inflation and prices. The current inflationary pressure is a result of wages, raw materials, energy, and transportation costs.
Consumers and corporations can lose significant purchasing power if inflation is left unchecked. As of 2022, supply chain disruptions caused by bottle logs and labor shortages have contributed to shipping delays. Companies were left with reduced inventory as a result of these moves.
The economy will eventually be able to balance the high costs naturally. However, it is important to understand and spread this critical knowledge to understand the complex reality in which we find ourselves. Tell us what your feelings are about inflation. What do you think are the main causes of it?