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Supply chain price pressures have healed yet their mark on inflation to endure


Supply chains across the world are healing up almost as fast as they broke down. That doesn’t mean the pressure they’re exerting on inflation will disappear as quickly.

Take the cost of shipping containers. Spot rates from Asia to the US West Coast increased more than 15-fold during the pandemic and have since returned to pre COVID-19 levels as trade between the world’s two largest economies cools from a frenzied pace.

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But the relief is uneven. Short-term prices for containers from Europe to the US East Coast are still more than double what they were in late-2019, according to data from Freightos Ltd.

What’s more, an estimated 70 percentof goods transported in steel boxes on giant ships do so under long-term contracts — not the spot market — and those deals were renegotiated in 2021 and 2022 at much higher rates. Big retailers and manufacturers may not be seeing enough shipping-rate reductions yet to warrant slashing prices further.

“We need to be cautious about the drop in spot prices for containerized freight,” said Jason Miller, an associate professor of supply-chain management at Michigan State University. “Most freight moves under contract prices that are still well above pre COVID-19 levels.”

Such stickiness may help explain why inflation in some regions remains stubbornly high. US producer prices rebounded in January by more than expected, underscoring persistent inflationary pressures, and another closely watched gauge of consumer costs came in hotter than forecast on Friday. In the euro area, underly-ing inflation hit a record in January, revised data showed last week.

Another reason the cost of living is slow to fall: It’s easy to underestimate how long it can take for inflationary trends to work through supply chains. That’s partly because companies don’t like to change their pricing more than a couple of times a year, according to Chris Rogers, head of supply-chain research at S&P Global Market Intelligence.

“Whilst the underlying prices have been coming down, it could take quite a long time for that to feed in,” Rogers said. “We’re still seeing some of the inflationary hangover coming through to prod-uct pricing now and it could take much of the rest of the year for that to flow through to prices, whether it’s producer or consumer.”
“There are also some temporary factors at play now,” Rogers said.
In order to clear backlogs of inventory built up during the pandemic’s surge in consumer demand, many companies cut prices in the second half of last year.

Labor costs

But now many firms are facing enduring increases in one of their biggest costs: labor.

Worker shortages are hitting the supply-chain industries hard, said Nicholas Sly, vice president and economist at the Federal Reserve Bank of Kansas City.

“There are several parts of the logistics sector that are actually quite labor intensive,” Sly said. “Drivers make up a very notable part of this, but warehousing also requires a lot of workers,” he said.

It’s time consuming and costly to train new employees, and that drag on productivity only adds to costs. On top of higher paychecks, other basic costs of business have risen. Long-distance motor carrying is one sector that’s “not anywhere near pre-pandemic levels,” according to Michigan State’s Miller.

Higher costs for diesel, industrial equipment, and major capital expenses like new and used trucks still abound, he said. The cost to make truck trailers and chassis, for instance, remains elevated, according to data compiled by the St. Louis Fed. Driver wages have increased substantially, and so have maintenance charges on all modes of cargo transportation.

“Across the board, you have higher costs, so that’s going to have to translate to higher freight rates,” Miller said. “We may have seen ocean spot rates come back to their pre COVID-19 levels. We’re not seeing that in domestic truck transportation. We’re not seeing that in domestic rail-freight prices, either.”

Nor have storage costs seen any kind of sustained declines.
WarehouseQuote expects warehouse-storage pricing to continue growing this year, owing to industrial real estate rents and labor-cost increases, and as vacancy rates remain below historical av-erages.
Even so, the easing of some supply-chain strains means logistics issues are contributing far less to inflation than services, according to Flexport Inc.’s chief economist, Phil Levy.

In the US, consumer-inflation data earlier this month showed commodities, excluding food and energy, rose 1.4 percent from a year earlier — a rate that should give Federal Reserve officials some comfort that their policy tightening is having an effect, given they target annual inflation of 2 percent, albeit using a separate measure. But services inflation, minus energy services, is running at 7.2 percent.

“What we’ve had is something of a hand-off, where it went from really quick-spiking goods inflation to a big drop in the amount that’s coming from goods,” Levy said. “It’s not every single com-ponent of the supply chain has moved in lockstep, but things have let up quite a bit.”

In the latest wave of earnings reports, US retail chiefs highlighted improvements in logistics pressures, but the price pain isn’t necessarily over.

“While the supply-chain issues have largely abated, prices are still high and there is considerable pressure on the consumer,” Walmart Inc. Chief Financial Officer John David Rainey said on a conference call on Tuesday.

Gina Boswell, the CEO of Bath & Body Works Inc., said she sees economic headwinds from prices continuing for now, though that may change later in 2023.

“We expect that we will continue to see inflationary pressure on our input costs in the first quarter before beginning to see some relief as we move through the year,” she said on a conference call last week.

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Abu Dhabi Overtakes Oslo for Sovereign Wealth Fund Capital in Global SWF’s First City Ranking

Today, industry specialist Global SWF published a special report announcing a new global ranking of cities according to the capital managed by their Sovereign Wealth Funds (SWFs). The findings show that Abu Dhabi is the leading city that manages the most SWF capital globally, thanks to the US$ 1.7 trillion in assets managed by its various SWFs headquartered in the capital of the UAE. These include the Abu Dhabi Investment Authority (ADIA), Mubadala Investment Company (MIC), Abu Dhabi Developmental
Holding Company (ADQ), and the Emirates Investment Authority (EIA). Abu Dhabi now ranks slightly above Oslo, home to the world’s largest SWF, the Government Pension Fund (GPF), which manages over US$ 1.6 trillion in assets. Abu Dhabi and Oslo are followed by Beijing (headquarters of the China Investment Corporation), Singapore (with GIC Private and Temasek Holdings), Riyadh (home to the
Public Investment Fund), and Hong Kong (where China’s second SWF, SAFE
Investment Corporation, operates from). Together, these six cities represent two thirds
of the capital managed by SWFs globally, i.e., US$ 12.5 trillion as of October 1, 2024.
For the past few decades, Abu Dhabi has grown an impressive portfolio of institutional
investors, which are among the world’s largest and most active dealmakers. In addition
to its SWFs, the emirate is home to several other asset owners, including central banks,
pension funds, and family offices linked to member of the Royal Family. Altogether, Abu
Dhabi’s public capital is estimated at US$ 2.3 trillion and is projected to reach US$ 3.4
trillion by 2030, according to Global SWF estimates.
Abu Dhabi, often referred to as the “Capital of Capital,” also leads when it comes to
human capital i.e., the number of personnel employed by SWFs of that jurisdiction, with
3,107 staff working for funds based in the city.
Diego López, Founder and Managing Director of Global SWF, said: “The world ranking
confirms the concentration of Sovereign Wealth Funds in a select number of cities,
underscoring the significance of these financial hubs on the global stage. This report
offers valuable insights into the landscape of SWF-managed capital and shows how it is
shifting and expanding in certain cities in the world.”

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AM Best Briefing in Dubai to Explore State of MENA Insurance Markets; Panel to Feature CEOs From Leading UAE Insurance Companies

AM Best will host a briefing focused on the insurance markets of the Middle East and North Africa (MENA) on 20 November 2024, at Kempinski Central Avenue in Dubai.
At this annual regional market event, senior AM Best analysts and leading executives
from the (re)insurance industry will discuss recent developments in the MENA region’s
markets and anticipate their implications in the short-to-medium term. Included in the
programme will be a panel of chief executive officers at key insurance companies in the
United Arab Emirates: Abdellatif Abuqurah of Dubai Insurance; Jason Light of Emirates
Insurance; Charalampos Mylonas (Haris) of Abu Dhabi National Insurance Company
(ADNIC); and Dr. Ali Abdul Zahra of National General Insurance (NGI).
Shivash Bhagaloo, managing partner of Lux Actuaries & Consultants, will his present
his observations in an additional session regarding implementation of IFRS 17 in the
region. The event also will highlight the state of the global and MENA region
reinsurance sectors, as well as a talk on insurance ramifications stemming from the
major United Arab Emirates floods of April 2024. The programme will be followed by a
networking lunch.
Registration for the market briefing, which will take place in the Diamond Ballroom at the
Kempinski hotel, begins at 9:00 a.m. GST with introductory comments at 9:30 a.m.
Please visit www.ambest.com/conference/IMBMENA2024 for more information or to
register.
AM Best is a global credit rating agency, news publisher and data analytics
provider specialising in the insurance industry. Headquartered in the United
States, the company does business in over 100 countries with regional offices in
London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.

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Future of Automotive Mobility 2024: UAE Leads the Charge in Embracing Digital Car Purchases and Alternative Drivetrains

-UAE scores show highest percentage among the region in willingness to purchase a car
completely online
– Openness to fully autonomous cars has grown to 60% vs previous 32%.
– More than half of UAE respondents in the survey intend to move to hybrid cars during
next car purchase, while less than 15% intend to move to fully electric car.
– UAE sees strong use of new mobility services such as ride-hailing (Uber, Careem, Hala
Taxi)
– The perceived future importance of having a car is not only increasing in UAE but is
higher than any other major region globally, even China

Arthur D. Little (ADL) has released the fourth edition of its influential Future of Automotive Mobility (FOAM) report, presenting a detailed analysis of current and future trends in the automotive industry. This year’s study, with insights from over 16,000 respondents across 25 countries, includes a comprehensive focus on the United Arab Emirates (UAE). The report examines car ownership, electric vehicles,
autonomous driving, and new mobility services within the UAE.

“The UAE is at the forefront of automotive innovation and consumer readiness for new mobility
solutions,” said Alan Martinovich, Partner and Head of Automotive Practice in the Middle East
and India at Arthur D. Little. “Our findings highlight the UAE’s significant interest in
transitioning to electric vehicles, favorable attitudes towards autonomous driving technologies,
and a strong inclination towards digital transactions in car purchases. These insights are critical
for automotive manufacturers and policymakers navigating the evolving landscape of the UAE
automotive market.”
Key Findings for the UAE:
1. Car Ownership:
o Over half of UAE respondents perceive that the importance of owning a car is
increasing, with the study showing the increase higher than any other major
region, including China.
o Approximately 80% of UAE respondents expressed interest in buying new (as
opposed to used) cars, above Europe and the USA which have mature used
vehicle markets

2. Shift to Electric and Hybrid Vehicles:
o While a high number of UAE respondents currently own internal combustion
engine (ICE) vehicles, more than half intend that their next vehicle have an
alternative powertrain, with significant interest in electric and plug-in hybrid
(PHEV) options. Less than 15% plan to opt for pure battery electric vehicles
(BEVs).

3. Emerging Mobility Trends:

o Ride-hailing services are the most popular new mobility option among UAE
residents, with higher usage rates than traditional car sharing and ride sharing.
The study indicates a strong openness to switching to alternative transport modes
given the quality and service levels available today.

4. Autonomous Vehicles:
o UAE consumers are among the most open globally to adopting autonomous
vehicles, with a significant increase in favorable attitudes from 32% in previous
years to 60% this year versus approximately 30% in mature markets. Safety
concerns, both human and machine-related, remain the primary obstacles to
broader adoption.

5. Car Purchasing Behavior and Sustainability:
o The internet has become a dominant channel for UAE residents throughout the car
buying process, from finding the right vehicle to arranging test drives and closing
deals. UAE car buyers visit dealerships an average of 3.9 times before making a
purchase, higher than any other region in the world, emphasizing the need for
efficient integration of online and offline experiences.
o Upwards of 53% of respondents from the region would prefer to ‘close the deal’
and complete the purchase of their car online, which is the highest for any region
in the world.
o Sustainability is a key factor cited by UAE consumers as influencing car choice.
The UAE scored among the top half of regions, highlighting the importance of
environmental considerations.

“Our study confirms the promising market opportunities for car manufacturers (OEMs) and
distributors in the UAE” commented Philipp Seidel, Principal at Arthur D. Little and co-Author
of the Global Study. “Consumers in the Emirates show a great and increasing appetite for cars
while being among the most demanding globally when it comes to latest vehicle technologies
and a seamless purchase and service experience.”
The comprehensive report, “The Future of Automotive Mobility 2024” by Richard Parkin and
Philipp Seidel, delves into global automotive trends and their impact on various regions,
including the UAE. This study is an invaluable tool for industry stakeholders seeking to navigate
and leverage the dynamic changes driving the future of mobility.

 

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