Rising Inflation and its Impact in the World of Logistics

Inflation has been a word on just about everyone’s lips over the past six months – and for good reason. From seeing the price of everyday food and consumables rise to facing ever-increasing energy costs this winter, inflation is having a big impact on European shores and beyond.

In fact, according to statista, the inflation rate across europe reached an astonishing 10.9% in september 2022 and continued a trend that’s been heading skyward since the early part of the year. within that, estonia saw the highest inflation rate among eu countries at 24.1%, while france had the lowest at 6.2%.

To put it into perspective, the highest previously recorded monthly inflation rate in eu countries since january 1997 was 4.4% during the turbulent financial times of july 2008.

So what’s causing such unprecedented inflation levels across the continent? it’s impossible to pin this down to a single event or source, but rather a multitude of factors coming together and creating something of a perfect financial storm.

Stringent covid-19 restrictions and subsequent economic policies, consumer demand fluctuations, supply chain bottlenecks, freight rates, food shortages and increasing energy prices are all contributing to inflation across europe, with the war in ukraine serving as a trigger for a substantial part of the crisis.

Chiefly for companies around the world, inflation has put margins under immense pressure and added a renewed focus on reducing costs across the board – including putting logistics operations and costs under the microscope.

Second, and most apparent, we see the cost of energy in households and within businesses rising to unsustainable levels in some cases. In the UK, for example, household gas and electricity bills have jumped by 80%, while some businesses like pubs are seeing annual rises of as much as £90,000 (€103,000) per year in some cases (New York Times).

With this comes widespread uncertainty and insecurity amongst human beings, prompting changes in our behaviour and how we spend our money. Everyday necessities end up replacing luxuries; and the less we spend out in the world means the more the economy suffers.

An unexpected reduction in demand without supply following suit has led to stock issues for retail businesses and more, as CBS reports that some stores are overstocked by as much as 30% and desperately looking to shift inventory at cut prices.

What this means in the world of logistics is that warehouses are filling up with stock that businesses are unable to sell and subsequently replace with new produce. This in turn has seen containers of stock piling up at ports and terminals across Europe, resulting in high Detention and Demurrage costs and potentially slowing down operations at the same time.

Planning ahead intelligently is a big part of supply chain resilience, but economic uncertainty can make this even more of a challenge. And such is the uncertainty in 2022 that Gartner are encouraging supply chain leaders to prepare for a potential recession to come in the next year.

That much remains to be seen, but as energy prices continue to cause a domino effect of issues, getting prepared with your logistics service provider is a good first step for battling what’s to come.

The price of food

One of the most apparent inflation issues for the average consumer is food, which sits as the second-highest-inflated sector in September 2022 at 15.4% (Statista) – and the situation in Ukraine is playing a fundamental part.

As per OECD, Russia and Ukraine are among the globe’s most prominent exporters of arable crops, particularly cereals and oilseeds. For example, they are the first- and fifth-largest wheat exporters in the world and respectively account for 20% and 10% of global exports.

Turkey has been a typical illustration of this difficulty, as the country is reportedly one of the biggest importers of produce from both Russia and Ukraine (its imports of cereals from Ukraine alone stood at $994 million in 2021, per Trading Economics). Other factors are certainly considered, but the fact remains that Turkey is now facing some of the highest inflation rates in the world – sitting at 80.2% in August 2022.

Combatting this impact is incredibly complicated and could be a case of finding a new balancing act for supply and demand: potentially increasing the production of cereal and oilseed in other countries for supply, while reducing their use in non-food commodities to help with demand for human consumption.

For logistics providers, it’s been about finding ways to facilitate international trade and enabling agricultural exports from Ukraine. There’s no telling when the end of the war will be at this stage, but as repairing domestic infrastructure could take some time, the likes of sourcing alternative routes and enabling the use of different ports could be an important, long-term solution for Ukraine and the world.

Oil nearing record levels

The price of oil is another area that has drastically affected inflation and consumer spending in the economy in recent months. Crude oil reached the heights of $123.21 per barrel in 2022, eclipsed only by the summer of 2008 at $147.27 (Statista).

During the Covid pandemic, the price of crude oil fell considerably as businesses closing and members of the public not travelling reduced energy demands. However, as life returned to some sort of normality and demand rose, suppliers have struggled to keep up and prices have increased.

The price of fuel is one of the many contributing factors to heightened ocean and inland freight rates around the world – up seven times on average pre-pandemic levels – although the overall situation is complicated.

Logistics as we know it has been spun out of rhythm over the past two years, with supply and demand discrepancies, low reliability, global port congestions, labour shortages, capacity constraints and more all coming together to put pressure on rates.

However, while the circle of inflation affecting freight rates and freight rates affecting inflation is set to continue in the short-term, the outlook is positive for pressure coming down in the not-too-distant future – albeit not to the levels seen before Covid due to inflation’s impact on operational costs.

Inflation has very much added to the unpredictable nature of 2022, and there’s still a long way to go before financial parity returns and the benefits are felt for businesses and within society.

However, inflation has been just one of the contributing factors behind supply chain disruption over the course of the year, as a number of issues have come together from every which direction to pose challenges.

As more of the same uncertainty is expected in 2023, the overwhelming call is to make supply chains as resilient as possible. Preparing for every eventuality is an absolute must to bounce back from future adversity.