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<\/a>Service metrics have sunk as rates have risen. Denmark-based consultancy Sea-Intelligence reported that global carrier schedule reliability fell to 33.6% in August, an all-time low. In August 2019, pre-COVID, reliability was more than double that. Sea-Intelligence calculated that the global delays for late vessels was 7.57 days, almost double the number of days late in August 2019.<\/p>\n\n\n\n U.S.-based supply chain visibility platform Project44 highlighted the diverging paths of pricing and quality by contrasting its data on average days delayed with Xeneta\u2019s short-term rate data. Between August 2020 and this August, project44 found that the monthly median of days delayed on voyages from Yantian, China, to Los Angeles increased 425%, from 2.46 days to 12.93. Over the same period, average short-term rates jumped 102%.<\/p>\n\n\n\n Neil Irwin of The New York Times recently wrote about \u201cshadow inflation\u201d<\/a> \u2014 when you pay the same as before for something that\u2019s not as good as it used to be, so you\u2019re effectively paying more.<\/p>\n\n\n\n A pre-COVID example of shadow inflation: the infamous Lay\u2019s potato chip incident of 2014<\/a>. Lay\u2019s intentionally included about five chips less per bag, lowering content from 10 ounces to 9.5, yet still charged $4.29 per bag, meaning customers were paying (and Frito-Lay was making) 5.3% more per ounce of chips.<\/p>\n\n\n\n The opposite \u2014 and until COVID, far more common \u2014 scenario is when product quality rises faster than pricing, decreasing effective inflation, as in the case of computers and other tech products. This downward effect on inflation is incorporated into the Consumer Price Index (CPI) via so-called hedonic adjustments.<\/p>\n\n\n\n As recounted by Irwin and Full Stack Economics author Alan Cole<\/a>, COVID flipped hedonic adjustments in the other direction, toward lower quality per dollar paid, the equivalent of inflation.<\/p>\n\n\n\n Pointing to restaurants and hotels, Irwin wrote, \u201cMany types of businesses facing supply disruptions and labor shortages have dealt with those problems not by raising prices (or not only by raising prices), but by taking steps that could give their customers a lesser experience.\u201d<\/p>\n\n\n\n According to Cole, \u201cOver the last 18 months \u2026 goods and services are getting worse faster than the official statistics acknowledge,\u201d implying that \u201cour inflation problem has actually been bigger than the official statistics suggest.\u201d<\/p>\n\n\n\n Ocean container shipping is an extreme example of the \u201cservices are getting worse\u201d trend, despite enormous freight-rate inflation.<\/p>\n\n\n\n Measuring quality adjustments to inflation is inherently difficult, which is why very few CPI categories have hedonic adjustments<\/a>. One way to do a back-of-the-envelope estimate of ocean shipping shadow inflation is to focus on time: the longer the delays, the less quality, the higher the cost fallout, the higher the effective inflation above and beyond the rise in freight rates.<\/p>\n\n\n\n Jason Miller, associate professor of supply chain management at Michigan State University\u2019s Eli Broad College of Business, suggested using accounting of inventory carrying costs to measure the time effect.https:\/\/c5ca4c9f923d81fd8ac57be7c2d09a5a.safeframe.googlesyndication.com\/safeframe\/1-0-38\/html\/container.html<\/p>\n\n\n\n \u201cIf I already own a product and I took possession of it overseas at the port of departure, and it\u2019s on my balance sheet and it\u2019s just sitting on the water, then in inventory management, there is a charge incurred every day it\u2019s not sold,\u201d he explained.<\/p>\n\n\n\n Miller explained, \u201cThere is the cost of capital. Every $100 in inventory is $100 that can\u2019t be allocated elsewhere for a more value-producing purpose. There is also the cost due to obsolescence. It\u2019s essentially opportunity costs. The longer the delay, the more additional costs from stockouts [as shelves empty] or the need to buy more safety stock.\u201d<\/p>\n\n\n\n Whether it\u2019s price inflation from rate hikes or indirect shadow inflation from slow service, different shippers are affected very differently.<\/p>\n\n\n\n On the rate side of the equation, Xeneta data shows a massive $20,000-per-FEU spread between the lowest price paid by large contract shippers in the trans-Pacific trade and highest price paid by small spot shippers.<\/p>\n\n\n\n Erik Devetak, chief data officer of Xeneta, told American Shipper, \u201cWe see the very bottom of the bottom of the long-term market at approximately $3,300 per FEU, although there are very few contracts at this price. On the other hand, we see the short-term market high up to $23,000 per FEU, again, in rare situations.\u201d<\/p>\n\n\n\n![\"\"](\"https:\/\/s29755.pcdn.co\/wp-content\/uploads\/2021\/10\/sea-intelligence-1200x383.jpg\")
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Shadow inflation<\/h4>\n\n\n\n
Shadow inflation and container shipping<\/h4>\n\n\n\n
Rate rises affect different shippers differently<\/h4>\n\n\n\n