Transportation Costs on the Rise

greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread

LINK

Transportation Costs On the Rise By Francis X. Markey 2/29/00 4:04 PM ET

Numerous factors have contributed to the subdued nature of CPI and PPI inflation in recent years. Relatively modest wage increases, high productivity growth, and international competition are seen as the primary factors restraining accelerated inflation despite tightening labor markets and robust overall economic growth.

However, several developments are arising in this rosy picture to create inflationary pressures, in spite of the many positive factors. Foremost among these inflation-inducing factors is the rising cost of transportation, most recently manifested in a broad-based rate increase by the nation's major railroads.

While the railroad price hikes are fairly modest, they are significant, as railroads have not enacted a broad rate increase in several years. In fact, many rail rates have fallen in real terms over the past decade, and are well below their level of twenty years ago when the industry was deregulated in the Staggers Rail Act.

The increase is also significant in the context of other rising transportation costs. Rising fuel and equipment costs, the primary impetus behind the rail rates, are impacting other modes of transport as well. Trucking costs have increased steadily in recent years and are likely to jump up in 2000 as diesel prices have risen precipitously in recent months. Increased fuel costs are also likely to boost air freight prices in coming months as well, while rates for maritime shipping have ballooned in the past year due to global economic developments.

The viability of the rate increases varies among the different transportation modes. Air cargo carriers and trucking firms have exercised a moderate amount of pricing power and will be able to pass on a large portion of their present costs, as well as any future cost increases, to producers and consumers. These transportation modes owe their pricing power to the flexibility of service they offer and to the increasing role of time-definite deliveries in the modern economy. Maritime rate increases, which stem from the combined effect of the trade fluctuations in the past two years and the pricing deregulation of the Ocean Shipping Reform Act, have stabilized. Obviously, the maritime industry as a whole maintains pricing power, as there is no ready substitute for bulk trans-oceanic trade. Among the transportation modes, railroads will have the most difficulty enacting their rate increases. Despite their relatively low rates, rail firms consistently lose business to trucking firms due to customer dissatisfaction.

Three possibilities loom in the wake of the announced railroad rate increases. The first scenario is that railroads are completely unable to effectively pass cost increases through to customers. In this case, the higher rail rates would stimulate a heightened exodus of goods to trucking firms. Industry revenues would likely suffer, while profit margins would be squeezed even further as further price increases are not a realistic option to boost profits. The inflationary pressures emanating from the transportation industry would be confined to the trucking and air freight industries in this situation.

A second possibility, that is the extreme opposite of the first, is that the rail rate hike is completely successful. In this scenario the concurrent rising cost of trucking allows rail firms to pass their full cost increases through to customers, including additional rate hikes, without a loss of business. Railroad margins would improve markedly in this case. However, inflationary pressures have the potential to increase greatly due to the differences in customer base between railroads and the modes of air and trucking. Manufacturers of basic products, such as grains, chemicals, and raw building materials, have a greater dependence on rail transport. Higher railroad prices passed through to these manufacturers could yield a noticeably higher effect on inflation as these products are used throughout the economy.

The final possibility is a middle ground between the first two scenarios. In this case, rising trucking prices allow rail firms limited success in the current rate hike, creating only a moderate increase to inflationary pressures. This scenario is most likely, as rail firms will encounter only mild resistance to the current rate increases since they are relatively mild. However, railroads will be wary of instituting a follow-up rate hike for fear of raising customer ire.

In any case, inflationary pressures will increase with the rising costs of transportation. However, the degree of these pressures will depend largely on the success of rail firms in passing through their rising costs in coming months.



-- canthappen (n@ysayer.com), February 29, 2000

Answers

It doesn't matter to the government how much transport prices increase. The Consumer Price Index and Producer Price Index will still show small if any gains. Why? The Labor Department will just factor in that computers are 20%, 40%, 60%, etc. more productive than last year's models. This phantom price decrease will offset the real increases that we have to pay for.

-- Mr. Adequate (mr@adequate.com), February 29, 2000.

Moderation questions? read the FAQ