Home Trucks What Can Trucking Expect from Inflation and Interest-Rate Numbers? [Analysis] – Fleet Management

What Can Trucking Expect from Inflation and Interest-Rate Numbers? [Analysis] – Fleet Management

by betweenbump
What Can Trucking Expect from Inflation and Interest-Rate Numbers? [Analysis] - Fleet Management
The largest contributors to the drop in inflation have been in smaller categories such as Energy and Vehicles, but each of those cateories makes up only about 8% of the index.  -  Source: Company reports, Tahoe Ventures

The largest contributors to the drop in inflation have been in smaller categories such as Energy and Vehicles, but each of those cateories makes up only about 8% of the index.

Source: Company reports, Tahoe Ventures

With the release of the December Consumer Price Index (CPI) report, we received confirmation of a trend that started in October: Inflation across the country is indeed beginning to subside. But is it too early to declare victory?

Slowing inflation means the Federal Reserve will slow down its pace of interest rate increases that it implemented to slow the overheated economy. The questions are, how much, how fast — and how might that affect the outlook for trucking fleets?

How Much Will Interest Rates Rise?

A little over a year ago, the narrative from policy makers was that inflation was “transitory” and nothing to be so concerned about. Then supply chain issues deteriorated, a war broke out in Eastern Europe, and labor supply became problematic. The Consumer Price Index zoomed up from a 2% inflation rate toward 8% in a matter of months.

The Fed had to catch up to rampant inflation by aggressively raising interest rates from near-zero levels. As of mid-January, our Federal Funds rate was sitting at 4.5%.

With the CPI inflation rate coming in at 6.5% in December, current projections have interest rates topping out around 5.25% to 5.50% by mid-2023. In other words, the investor community believes that we are within a half point to three quarters of a point of the peak in rates, and that peak may come within the next six months. This would mean that 30-year mortgage rates could top out around 6.76%- to 7% (up three percentage points this year).

How Long are Rates Likely to be Elevated?

Currently, interest rate markets are predicting that after those rates peak at 5.25% to 5.5% mid-year, they’ll keep dropping toward 4.25% in 2024.

If we encounter a recession as many forecasters believe will happen in mid-2023, why won’t rates decline more? The focus of the Fed is more on defeating inflation than maintaining a healthy short-term economy, so in our view, the Fed is less likely to blink and lower rates quickly when greater economic weakness is present. That means rate increases will continue until the Fed believes that inflation has not only peaked, but that it is also well on its way toward the desired 2% range. We are not of this opinion this happens so easily, and the Fed may ultimately have to think of 3% as a victory.

The graph at the top of the page breaking down the components in inflation illustrates that the largest contributors to the drop have been in smaller categories such as Energy (has dropped from 41% growth to 7% but is only 8% of the index) and Vehicles (down from 15% to about 4%, but it is only about 8% of the index). Along with a modest decline in Consumer Household Goods, this has helped bring the index down from 8.1% to 6.5%. But that is still a long way from 2%.

Looking at the graphic, about 52% of the index is represented by Shelter (+7.5% and rising), Food (+10.4% and rising) and Transportation Costs (+14.6% and rising). This implies that we may stay in this 5%-6% range for a while longer — and that while rates may be peaking, they may not be coming down so quickly.

How is Inflation Affecting Trucking?

Fourth-quarter freight was underwhelming, largely as companies worked to correct too-large inventories. While spot rates pulled back aggressively over the summer, they seem to have leveled out by year-end and are exhibiting more regular seasonality. Contract rates were up by high single digits at the end of the third quarter but could be flat-to-negative when we see results from the fourth quarter. Contract rates will spend much of 2023 resetting downward (albeit less so). While fuel costs have been declining, they remain about 20% higher. Driver costs have abated but continue to be higher by double digits for many fleets. And while purchased transportation costs have come down with spot rates, maintenance costs remain elevated.

Lastly, with higher interest rates, financing costs will be rising as well, as used-truck equipment prices are likely to decline further in 2023. This is likely to continue to put pressure on truck fleet profit margins for much of this year, at least until labor wage rates grow slower than customer rates, which may not be until 2024.

A version of this column appears as “Behind the Numbers” in the January/February issue of HDT.



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