Why Aren't Trucking Costs Pushing Prices Up?

Here's a little puzzle for you: why are energy prices NOT bleeding over into core inflation? Most goods on the shelf are delivered by truck, and fuel costs have skyrocketed. Yet inflation outside of food and energy isn't so bad. Yes, it's edging up, but still is below the inflation rates of 2006.

The answer is within the transportation industry. Tonnage has generally been declining since late 2006, according to the American Trucking Association. The chart shows a surprising bump up in the last two months; I'm still pondering that.

The Association of American Railroads reports a decline in rail tonnage.

Here's why inflation is not spreading due to fuel costs. At the peak of the transportation boom, truckers and rail companies boosted prices in response to soaring demand. One truck company president told me that his fuel surcharge was larger than his total fuel bill. He did not say higher than his incremental fuel bill, he said higher than his total fuel bill. So the "fuel surcharge" of two years ago was simply a way to raise prices.

Now costs are up for truckers and railroads, but freight volumes are down. The transporters are not able to boost prices, because excess capacity in a competitive industry pushes prices down. The companies are facing lower profit margins, so inflation is NOT bleeding over into the non-fuel sectors of the economy.

Business planning implications: if you ship goods, you'll be very vulnerable to a freight cost increase when the economy rebounds. At that time, look for the double whammy: higher fuel costs and rising profit margins. In the meantime, enjoy this temporary respite.

Comments

[deaverb]

A wonderful article for Main Street, where we play and have been surprised by a lack of fuel increases--and better service by truckers.

Thanks for the focus.

[Logistics Mac]

Wonderful article?.. my gasoline has not affected the real costs of inflation either I suppose?

Your article assumes the profits the truckers generated were not needed or necessary. The employees want pay increases, the health and benefits costs increases, the aging driving force is causing driver shortages, its a lousy job driving over the road for a living, being gone for 5-8 weeks at a time and making $50,000 a year if your lucky, fighting the cars for respect and shippers and receivers who treat drivers like they are non people.

For most drivers anyway...

Equipment costs are constantly going up. a tractor today cost closer to $100,000.00 than ever before. They get less fuel mileage thanks to EPA mandates. Trailers are more costly due to braking requirements and safety mandates, all good stuff but who can stay in business if you cannot make a profit?

Buffett has the final word about trucking.. stay away from companies who have very high equipment costs and have to replace that equipment frequently. He has no airlines except his Jet's for rent.. and has only has rail stocks because they do have an advantage over trucks in some areas and as fuel increases, the rails advantage widens. But only in certain lanes.

Fuel is averaging over $4.25 a gallon for diesel on both coasts. No one can absorb the costs of fuel and it not show up in the prices at the marketplace. The drivers still want raises, the benefits still go up. Fed Ex and UPS took a 5% price increase. Fed Ex is bleeding red ink due to their LTL Freight President cutting their FSC last fall. What a bonehead move for a guy supposing so smart.. they tell all the costs of fuel is causing them to bleed... HELLO!

Truckers are slammed by those who never run or worked in a truck. Its very hard work and even the very best trucking companies face enormous challenges brought on by regulation, scale stops by states trying to generate revenue by finding violations that do not exist, driver shortages, fuel at substantial increases between DOE increases eaten by the trucker or driver. New driver rules administering fingerprints and security issues. This is just the tip.

Capacity is tightening up all across the US. Shippers are having delays finding trucks willing to take loads to destinations where there is no freight to haul back. The fuel costs to deadhead 50 or 100 miles to get a load is now a big issue.

No my friend, your charts may not show it right now.. but transportation is causing rising prices, fuel and increases in linehaul due to capacity. Be encouraged though, its the slow time of year! Peak is ahead and the summer Olympics are changing the import landscape for the 3rd and 4th quarters. Serious challenges are ahead for us in transportation, and we all will find the inflation costs very real.. its real for some of us right now....

Disclosure: I own YRCW.. excellent long opportunity.