Will the Inflation Reduction Act Reduce Supply Chain Costs?

The Inflation Reduction Act, signed in August, is designed to ease rising cost pressures for businesses and consumers. Its main intention is to curb inflation by reducing the federal deficit, lowering prescription drug prices, and investing in domestic energy production while promoting clean energy. The law, as passed, will raise $738 billion and authorize $391 billion in spending on energy and climate change, $238 billion in deficit reduction, three years of Affordable Care Act subsidies, prescription drug reform to lower prices, and tax reform.

Since its passage, inflation in trucking has continued to creep upward, pressuring supply chain costs and consumer prices. For the 12 months ending September, the consumer price index (CPI) was 8.2%, and the producer price index (PPI) was 8.5%.

So How Did We End Up With Such High Inflation?

For starters, blame the COVID pandemic. For the 12 months ending March 2020 (the beginning of the pandemic), CPI was 1.5%, and PPI's final demand index was 0.7%. As stores closed and airplanes grounded, trade temporarily grounded to a halt.

Stuck at home, consumers turned to the internet and began to order groceries, other consumer product goods, furniture, appliances and gardening supplies, hobbies, and more. The sudden demand for residential deliveries overloaded last-mile delivery networks and resulted in increases in such surcharges as residential, additional handling, large and oversize packages, and the introduction of COVID surcharges — which, by the way, are still in existence today but renamed demand surcharges or non-seasonal peak surcharges.

The high demand also resulted in capacity shortages causing FedEx and UPS to restrict the number of trailers or other equipment to some shippers—further driving up inflation in trucking.

Trucking capacity also became scarce, with spot rates rising.

As shippers drew down existing inventories, replenishment became necessary to quickly satisfy consumers' spending habits. Toward the second half of 2020, demand for imports began to grow. However, there were not enough containers in Asia to export goods to the U.S. In addition, China had, and still maintains, a zero-COVID rule, meaning that to keep COVID outbreaks from spreading, China locks down a particular city or port, such as Ningbo and Shanghai. This, along with container shortages, drove up ocean freight spot rates and caused sporadic export delays.

Airfreight demand also increased, but with 50% of global capacity grounded, spot rates shot up quickly.

As the first anniversary of the pandemic approached, U.S. ports and airports were receiving record imports at higher rates. Bottlenecks at ports were an ongoing occurrence as trucks and rail could not keep pace with container pickups and drop-offs. As such, detention and drayage fees increased, and delays to warehouses, stores, or other final-mile locations occurred even more frequently.

Delays were resulting in not only higher costs to retailers and other shippers but also resulting in empty shelves for various goods.

By the end of 2021, bottlenecks at ports stretched into the Pacific Ocean. Over 100 ships waited to unload containers in December at Los Angeles and Long Beach, the U.S. gateways for Asian imports. Record imports, the sporadic closures of Asian cities combined with little to no room at ports for containers that needed to be picked up by truck or rail helped to create these backups.

Meanwhile, inflation jumped as retailers and other shippers began to pass supply chain costs on to customers.

CPI for all items rose 7.0%, the largest December-to-December percent change since 1981. PPI's finished goods index increased 6.9% for the 12 months ending December 2021, the largest calendar-year increase since data were first calculated in 2010.

2022 ushered in a year of higher fuel prices attributed to the Russian invasion of Ukraine in March, declines in spot rates, and higher inventory levels for many retailers. Higher fuel surcharges were added to all modes of transportation to recoup higher prices. At the same time, shippers began to turn away from spot rates in favor of the perceived safety of contracts to ensure capacity.

Inventory levels became too large for many retailers as consumers — thanks to delays, changing preferences, and the beginnings of belt-tightening — began to be more cautious in how and where they spent their money.

With warehouses bulging, many retailers opted to incur additional fees by keeping some inventory in containers and trailers at ports or outside warehouses.

Labor shortages contributed to the problem, and union disputes are an ongoing concern.

To keep freight moving throughout supply chains, additional workers were recruited throughout the pandemic at higher hourly pay while existing workers received bonuses and pay raises. Despite higher pay, many shippers and supply chain businesses struggled to attract the number of workers needed.

Union contract negotiations have also been a struggle. The ILWU contract, representing port workers along the U.S. West Coast, expired on July 1. Negotiations continue.

Meanwhile, unions representing Class I railroads continue to fight for their members. Six of the 12 railroad unions representing 115,000 railroad workers nationwide have approved their tentative agreements with the railroads so far. Still, they must all ratify their contracts to avoid a strike that could potentially cost the U.S. economy billions. At the same time, the Brotherhood of Maintenance of Way Employees Division (BMWED) continues to negotiate a new deal. The latest proposal provides tens of thousands of rail workers with 24% pay increases over five years from 2020-2024, immediate payouts averaging $11,000 upon ratification, and paid personal day off. However, it omits one of the union's key demands: paid sick leave.

How is Inflation affecting freight rates?

Spot rates will continue to fall heading into 2023. According to the freight exchange service provider, DAT, spot load posts in September were down 48.1% compared to September 2021.

Meanwhile, an important measure for ocean freight spot rates, Drewry's composite World Container Index (WCI), in October is 67% below the peak of $10,377 reached in September 2021 and 10% lower than the 5-year average of $3,740. But it is 138% higher than average 2019 (pre-pandemic) rates of $1,420, which means the market is slowly normalizing.

Inflation Reduction Act Shows Signs of Promise

After two years of disruptions, supply chains are slowly normalizing. PPI will likely go down quicker than CPI, but it will take time. Will the Inflation Reduction Act help? Maybe, maybe not.

If anything, the pandemic has emphasized outdated, inefficient supply chains. Shippers will retool supply chains and invest in much-needed technology for visibility, collaboration, and management of freight movements — such investments will help lower operational and shipping costs.

For instance, the Inflation Reduction Act is likely to accelerate the burgeoning migration to electric vehicles and conversions to cleaner fuel. The legislation provides enticing tax credits that could provide significant savings for shippers, 3PLs, and freight forwarders who make a move.

The total cost of ownership “on electric trucks in all modes, urban, regional, and long haul will be lower than diesel ones, approximately five years sooner than without the IRA,” host Jason Cannon pointed out during a CJJ 10-44 podcast in September.

The act also aims to spur investments in domestic manufacturing capacity and promote procurement of critical supplies domestically or from free-trade partners—steps that could also help shippers control costs.

Impact Could Be Seen `in early to mid-2023'

While this legislation is unlikely to have much impact on the current peak season surcharges, it may carry influence regarding the general rate increases by UPS and FedEx.

"We could start to see the cost in early to mid-2023, reflecting newer improved transportation costs," Tractor Supply CFO Kurt Barton told analysts on the company's Q3 earnings call.

Follow the Intelligent Audit blog for more supply chain news about inflation in trucking and industry trends.

Contact Us

Subscribe Now

It all starts with a conversation...

Get Started

Set up a call with one of our experts to discuss how Intelligent Audit can help your business uncover opportunities for cost reduction and supply chain improvements through automated freight audit and recovery, business intelligence and analytics, contract optimization, and more.

you may also enjoy

More Content Like This

Never Miss an Update

Subscribe Now