We know that multiple sources cause inflation. Everything from the high price of diesel, the supply chain disruption, the bottleneck of drivers, the massive amount of money printing that has taken place thanks to the Biden administration, and panic buying has contributed to high inflation. However, thankfully, one indicator contributing to inflation is now on the downswing.
Even though diesel is at record prices, truckers have noticed a drop in spot prices for shipping goods. Spot rates are used for shipping goods when a contracted supplier can’t be found. This means plenty of trucks are needed to fulfill contracts, and very few spot rates are required. As a result, the shortage of truckers has been alleviated, which means the bottleneck in the supply chain due to overland freight is about clear. This will reduce the cost of freight to be shipped.
That’s not all, though; truckers say a reduction in spot prices typically reduces the contract price. Contract prices have currently gone up by 3%. However, the Bank of America says that shippers expect contract prices to fall again. Contracts are how most of your goods get to the store from the distribution center. Currently, contracts are going for $2.91 per mile. They expect the rates will decline by $0.35 per mile in about three months. However, even with this reduction per mile, due to high diesel prices, it would take contracts declining by more than 12% before freight costs would reduce the price of goods enough to see it as a reduction on the store shelves.
Some concern from this sudden reduction is that a significant shipper was asked for a 25% rate reduction in the contract bid and that the decline came from the brokerage margin and not from their spot carriers. Another carrier had a contract with a large box retailer and was told the retailer would use its own private fleet instead of its services. A large manufacturer originally contracted for a van fleet with an increase of 12% in mileage price for the year suddenly wanted to renegotiate the increase to only 6%. Finally, one large beverage shipper has moved a third of its volume to in-house loading. This means that companies are actively searching for ways to reduce shipping costs due to the diesel price pressures and no longer have a shortage of drivers.
It’s not good for truckers. Any decrease in contract rates comes directly out of the operating margins. However, this is excellent news for consumers and retailers, which have had to deal with massive increases in shipping costs over the past two years. Much of the inflation we’ve had to deal with has been due to a shortage of drivers, supply chain issues and bottlenecks, and high transportation costs. Finally, it appears that the lack of drivers is over, the bottleneck neck in the transportation sector is cleared, and much of the high transportation costs are going down except for the price of diesel. Now, if only we could find a way to reduce the price of diesel and gasoline, life would be good again.