Global Shipping Costs Impact Australian Inflation Dynamics

In the ever-evolving landscape of global shipping, the impact of changes in shipping costs on Australian inflation has been a topic of significant interest. The COVID-19 pandemic shed light on how fluctuations in international shipping costs can reverberate through the supply chain, affecting consumer prices in Australia. The higher costs incurred in global shipping can cascade down to Australian firms dependent on imports, potentially leading to increased costs for consumers. Understanding the transmission of such shocks to Australian inflation has been crucial for policymakers, particularly the Reserve Bank of Australia (RBA), in gauging the inflation outlook.

The global shipping market has witnessed substantial shocks in recent years, influencing the cost dynamics of ocean freight. The balance between shipping supply and demand plays a pivotal role in determining shipping costs. Episodes like the COVID-19 pandemic, reduced water levels in the Panama Canal, and conflict in the Red Sea have disrupted the equilibrium, leading to unprecedented fluctuations in shipping costs. These disruptions, coupled with factors like limited ship availability, increased goods demand, and diversions due to conflicts, have significantly impacted global shipping costs.

The link between global shipping costs and Australian inflation is intricate. Higher shipping costs can escalate the expenses associated with importing goods, potentially prompting importers to pass on these costs to consumers. This pass-through effect can be observed in the prices of ‘shippable’ goods, which are more likely to be transported via ocean freight. The response of Australian inflation to global shipping cost shocks has been studied through various metrics, including consumer durables, tradable groceries, and trimmed mean inflation.

During the pandemic, the surge in global shipping costs coincided with a significant uptick in Australian inflation. The delayed effect of higher shipping costs on domestic inflation was evident, with inflation peaking in late 2022. However, disentangling the impact of shipping costs from broader global demand and supply shocks remains a challenge. Estimating the pass-through of shipping cost shocks to Australian inflation requires meticulous consideration of various factors influencing the inflationary environment.

The modelling approach used to estimate the pass-through of global shipping cost shocks to Australian inflation involved a local projections model. This method allowed for a direct estimation of the impact of shipping cost shocks on Australian inflation, considering Australia’s status as a small open economy. Controlling for factors unrelated to shipping costs, such as the Australian output gap and world food price, was crucial to obtaining accurate estimates of the pass-through effect.

The analysis revealed that while there is a substantial pass-through from global shipping cost shocks to the prices of ‘shippable’ goods in Australia, the pass-through to broader measures of CPI inflation like trimmed mean is less definitive. The impact of shipping costs on trimmed mean inflation was found to be more pronounced during the pandemic period, suggesting that in ‘normal’ times, the pass-through to broader inflation measures might be limited. Factors like consumer substitution patterns and supply chain dynamics play a role in shaping the inflationary impact of global shipping cost shocks.

In conclusion, the study underscores the complexity of the relationship between global shipping costs and Australian inflation. While the pass-through effect on ‘shippable’ goods inflation is notable, the influence on broader CPI measures remains less conclusive. The findings highlight the need for nuanced analysis when assessing the impact of global shipping cost shocks on domestic inflation and emphasize the role of various external factors in shaping the inflationary environment.