Trucking companies and consumers alike have been dealing with the harsh new realities of inflation. There are many reasons why inflation is rising. From rising wages to supply chain woes, you can basically pick a reason why prices have been skyrocketing. And just like many other industries and individuals, trucking companies are increasingly feeling the pinch.
With jobs coming back, wages rising, and stock markets hitting record highs, there has been a lot of pressure on industries of all types and sizes. Then why is consumer confidence at its lowest level in a decade? In one word: Inflation. The US inflation rate in October was the highest it has been since the early 90s. Even during 9/11 inflation was never this high. Sure, we saw a bump in prices and entered a recessionary period, but we haven’t seen this level of sustained inflation across multiple sectors in over three decades.
What is Inflation?
Inflation describes a general rise in the level of prices of all consumer goods and services. It is not specific to a particular good or service; rather it is a measure of when, broadly, things are more expensive than they were before. Inflation impacts consumers and businesses alike. And although inflation is usually measured through the Consumer Price Index, many people and businesses can simply feel the effects of inflation in their wallets and bank accounts.
Even more, the United States is not the only country feeling the impacts of inflationary pressures. From the United Kingdom to China and Germany – all are feeling the negative impacts of inflation on their economy. With economies all over the globe feeling the pressure, expect to see more action from Central Banks all over the world. The question is: Will it help?
While the U.S. Fed has already taken steps to reduce inflation, both ending its ongoing stimulus program and discontinuing bond buying, a rise in interest rates could create an economic recession. The Fed and the U.S. government face a delicate balancing act as they try to tamp down inflationary pressures while also preventing a recession.
Still, there are various ways in which these inflationary pressures impact the trucking and transportation sectors. From the price of fuel to truck driver employment, there are knock-on effects to rising prices, especially at the global level. As goods and services continue their volatile run, trucking companies both large and small will feel the pinch and must make serious adjustments. But how and when will these impacts be felt? Let’s take a closer look at how trucking companies are weathering the inflation storm.
Diesel Fuel and Inflation Concerns
Diesel prices surged to new highs in March, which is just one more indication that trucking fleet costs are rising sharply. Consumer inflation is also rising at its highest level in over 40 years. This has prompted the Federal Reserve to raise the target federal funds rate for the first time since 2018. Still, some economists are skeptical that the Fed’s moves to address inflation will work. Why? Because the inflationary pressures we are experiencing now are not normal.
Inflation is currently hovering around 8% of its annualized normal rate. Some have even said that inflation is likely to turn into hyperinflation and completely wreck the global economy. Still, if we exclude the volatile food and energy sectors, inflation is actually running close to 6% of its annualized normal rate. One reason economists exclude these factors is because they sometimes fall outside of normal pricing pressures.
Why is this? Because food costs often vary because of weather, from droughts to floods and freezing temperatures. Meanwhile, oil is still the main driver of the global economy. And when the world’s third largest producer of crude oil has decided to start a war in Europe, inflation pressures that were already rising have gotten worse over time.
Trucking Companies Feel the Impact
How is inflation impacting trucking companies specifically? Well, in many places. Inflation is showing up everywhere from truck driver wages to fuel, and trailer pries. In fact, the producer price index for trailers and chassis has been surging all year long. In February, the prices for trailers increased by 6.3%. This represented the largest increase since January, when it was 5.5%. Before that, the largest one-month gain occurred in October.
But why are trailer and chassis prices surging so much? Mainly because key materials used in their manufacturing are also surging. Aluminum, steel, lumber, and other essential materials have been rising exponentially. And yet, trailer and chassis costs are not the only threats trucking companies face from rising inflation.
The biggest threat trucking companies face is not from their own costs but rather how rising inflation will impact consumer spending. If consumers buy fewer goods because the items they want to purchase cost more, that means they will suffer from a loss of freight. A weakening of the freight environment is in turn impacted by the sharp rise in retail inventory levels, with one notable exception being the automotive sector.
Pricing is a Broader Concern
In February, retail and food service sales reached a near-record, but there are still some key details that impact trucking companies. For instance, gasoline sale were the highest in the retail sector, but that was driven by inflationary pressures. And though March data has not yet been released, many expect this trend to continue. If you exclude gasoline sales, retail sales may actually see a decline in March.
Pricing continues to weigh heavily on the trucking and transportation sectors. Adjusted for the Consumer Price Index, retail and food service sales fell 0.5% in February. Yet, February sales in actual dollars rose by an astronomical 25.2% higher than February 2020. This represents a big anomaly in terms of actual pricing.
Higher costs are certainly a concern, but an increase in interest rates may hold concerns down for some. Still, may worry that the negative impacts from rising inflation will dampen consumer spending, lead to less freight volume and, in the end, weaker freight rates. And yet, this represents only the beginning as Russia’s war in Ukraine begins to take a heavy toll on the global economy.
Ukraine War Increases Downside Risks
Not only has a record surge in fuel costs hit trucking companies particularly hard, but Russia’s disastrous war in Ukraine will also create a cascading effect of negative conditions for trucking companies. And although the long-term geopolitical effects are yet to be felt, the downside risks to trucking companies have increased greatly.
FTR’s trucking conditions index fell from 14.45 to 11.46 from December 2021 to January 2022. Freight rates have risen and remain in good standing, higher fuel costs and freight volume signify weaker future conditions for the entire sector.
The war in Ukraine has introduced a high level of uncertainty into the dynamics of truck freight. Sharply higher fuel costs for carriers are a given, but we do not yet know whether sharply higher gasoline prices on top of strong pre-existing consumer inflation and big swings in the stock market will lead to a drop in consumer spending.
Higher Diesel Prices May Price Out Small Trucking Companies
Real problems arise for smaller trucking companies. There are tens of thousands of private carriers in the United States that may fail simply because rising oil prices will put them into a tough situation. Should this happen, trucking analysts are unsure whether that outcome will strengthen or weaken today’s rate leverage. Many small trucking companies will simply find their truck drivers return to the broader pool.
If that happens, the transportation sector may see some relief from rate pressures, but the labor market has evolved to a point that no one knows for sure what will happen. In the end, there are five conditions that transportation analysts track to determine the health of the sector:
- Freight volumes
- Freight rates
- Fleet capacity
- Fuel prices
- Financing
These individual metrics, when combined, point to the overall health of the trucking industry and transportation sector. A positive score represents optimistic conditions, whereas a negative score represents pessimistic conditions. Readings at near zero are consistent with a neutral operating environment, where double-digit swings either way mean significant changes are coming. Currently, with the war in Ukraine raging on, expect the trucking conditions index to begin a swing into pessimistic territory. The fact is, war in Ukraine is not good for the trucking sector.