The Surge in Global Shipping Freight Costs
Today, let’s talk about inflation and how it’s influenced by global shipping freight costs. After the COVID-19 pandemic hit, from April 2020 onwards, shipping costs skyrocketed. They increased nearly seven to eight times their base rate of 100. Different shipping routes saw varying cost hikes. This surge lasted until January 2024, after which the costs dropped. But recently, in the past six months, we are witnessing another rise in freight costs.
Freight Costs as Inflation Indicators
While shipping costs may not seem important in our daily decisions, they are early indicators of inflation. As shipping costs rise, the overall cost of goods also increases since many products are transported globally. These higher shipping costs get passed on to consumers, leading to inflation. In India, inflation has been relatively low, staying below the 4% mark that the Reserve Bank of India (RBI) aims for. However, despite this, the RBI has not cut interest rates, keeping the repo rate steady for a while now.
Global Trends in Inflation
Other countries are experiencing slight upticks in inflation, including the US, some European nations, and Japan. This has raised concerns that the cycle of interest rate hikes we saw in the past couple of years may not be over. Instead of moving towards lower interest rates, there may be a need for further hikes to control inflation. Historical data from the 1970s shows that inflation often comes in waves. After an initial rise and subsequent fall, inflation can surge again before finally being controlled.
The Impact of Persistent Inflation
If we are indeed in a second wave of inflation, any hopes of interest rate cuts might be premature. Persistently high interest rates could negatively impact corporate profits and the ability of companies to expand. Raising money from markets is also easier during a downward interest rate cycle. Hence, if interest rates continue to rise, it could pose challenges for businesses and the overall economy.
Market Reactions to High Interest Rates
Interestingly, despite high interest rates, markets have not shown significant adverse reactions. Demand for real estate and other sectors remains strong. This resilience is somewhat surprising. However, any further increase in interest rates might eventually have a tipping point, leading to market downturns. It is essential to keep an eye on these early indicators to understand potential future trends.
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