June 23 (Bloomberg) -- What's good news for U.S. businesses may turn out to be bad news for Federal Reserve Chairman Ben S. Bernanke's fight against inflation.
The surging oil prices that are raising exporters' costs to ship everything from steel to sofas to America are encouraging customers to buy more domestically made goods -- and giving the producers of those goods more room to raise their prices.
The result: As Bernanke and fellow policy makers meet in Washington this week, they may find themselves starting to lose the benefit of the flow of inexpensive imports the chairman cited in a June 3 speech as a key force holding down living costs.
``It's changing global costs,'' says Jeffrey Rubin, chief economist at CIBC World Markets in Toronto. ``It's a huge inflationary threat.''
If competition from abroad wanes, Fed policy makers may in the future have to rely more on higher interest rates and less on trade to contain inflation. Traders in the federal funds futures market are betting the Fed will keep rates unchanged this week, then raise them in August or September to keep price pressures in check.
For importers, the rising cost of shipping is ``like an increase in tariffs,'' says San Francisco Fed economist Reuven Glick.
Just as duties on imported goods give domestic industries cover to raise their own prices, higher shipping costs have the same inflationary effect, Rubin says. He reckons that transport costs are currently the equivalent of slapping a tariff of more than 9 percent on imports into the U.S.
Made in America
Fuel costs have made it so expensive to ship low-priced bookshelves to the U.S. that Ikea is starting to make them in America. Asian steel exporters, saddled with higher freight rates, are losing U.S. market share, allowing domestic producers to boost their prices.
According to Rubin, who's written several reports on the subject, the expense of shipping a standard 40-foot container from East Asia to the East Coast of the U.S. has nearly tripled since 2000. Freight costs would almost double again, he says, if oil prices head toward $200 per barrel from about $137 today.
Air-freight costs are rising too, up almost 16 percent in the last year for cargo going to the U.S., according to the Bureau of Labor Statistics.
Imports are already getting more expensive. The cost of foreign goods excluding petroleum climbed at an annual rate of 6.6 percent in May, the fastest increase since 1988, the BLS says.
Iron and Steel
Iron and steel import prices were up 46.4 percent in May from a year earlier, government figures show. That allowed U.S. producers to increase their prices 32.6 percent in the same period without having to worry about losing market share.
U.S. steel production has risen nearly 3 percent this year as imports have declined 12 percent, according to the American Iron and Steel Institute in Washington.
``Higher freight rates were the final straw in tipping the balance to domestic producers,'' coming, as they did, on top of a weaker dollar, says John Anton, director of steel service at Lexington, Massachusetts-based Global Insight Inc.
`` A weak dollar means that domestic producers are better sheltered from competition by foreign suppliers,'' Edmund Phelps, winner of the 2006 Nobel Prize for economics and a professor at Columbia University, said in a June 18 interview on Bloomberg Radio. ``So the domestic producers here in the United States will have every incentive, therefore, to take advantage of that greater protection from competition by raising their markups.''
Chinese Firms' Disadvantage
Chinese steelmakers are doubly disadvantaged by higher oil prices. Not only do they face the added cost of shipping products to the U.S., they also must pay more to transport iron ore to their mills from Brazil and Australia.
Baosteel Group Corp., China's biggest steelmaker, agreed today to pay Rio Tinto Group at least 80 percent more for contracted iron ore this year. The Australian miner had been demanding a premium for its material because it costs China less to ship it than it does iron ore from Rio Tinto competitor, Cia. Vale do Rio Doce of Brazil.
Vale, the world's largest exporter of iron ore, said in February it won an increase of between 65 percent and 71 percent for annual contracts.
Pittsburgh-based U.S. Steel Corp. in contrast, is able to meet the majority of its iron-ore needs in North America from its two mines in Minnesota, company spokesman John Armstrong says.
Allen Sinai, chief economist at Decision Economics in New York, says many companies will have to reassess their shipping and sourcing strategies if fuel prices stay up. The result may be higher business costs and inflation, he adds.
Redoing the Sums
Furniture companies are among those redoing the sums. Prices for imported furniture and related products rose 6.3 percent in May compared with the year-ago month. That's the biggest increase since at least 1993, the earliest year such BLS statistics are available.
Rising freight costs were a major reason why Ikea, the world's largest home-furnishings retailer, decided in late 2006 to build its first factory in the U.S. The 930,000 square-foot plant, which opened last month in Danville, Virginia, will produce a variety of products Ikea had been importing from Europe, including bookshelves, coffee tables and entertainment systems.
``Transporting some products can cost as much as manufacturing them,'' says Joseph Roth, a U.S.-based spokesman for the Swedish company.
Other retailers and consumer companies may follow Ikea's lead and start to source more goods locally. San Francisco-based jeans maker Levi Strauss & Co. is among those forging partnerships with domestic producers to reduce shipping expenses, ease environmental concerns and improve quality, according to a survey released by PricewaterhouseCoopers on June 11.
No `Screeching Halt'
``I wouldn't expect global trade to come to a screeching halt, but higher fuel prices will have an impact,'' says David Hummels, a professor at Purdue University in West Lafayette, Indiana, who has done research on trade and transport costs.
He says the most-affected goods are those shipped by air -- where fuel accounts for a bigger share of freight rates than with ocean transport -- as well as cargo such as steel or cheap furniture with high weight relative to its value, and merchandise produced through complex global supply chains.
Any of these factors could provide U.S. businesses with an opportunity to boost prices in the coming months.
``The rise in transport costs will relieve some pressure on domestic firms to compete with foreign companies,'' says Menzie David Chinn, a professor at the University of Wisconsin at Madison, who worked at the White House Council of Economic Advisers in 2000 and 2001. ``There will be less restraint on inflation.''
To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net.
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