An acquisition and a hurricane | Freightonomics

Zach Strickland (0:16)

Two FreightWaves today, now the Freightonomics version of FreightWaves today. Zach Strickland here with DJ Donahue, Head Economist here at Sonar.

Got some big headlines to go over this week. We've got, you just heard me talk about a hurricane coming in through the Gulf. However, yes, keep your eyes and attention there. We don't know what's gonna happen with that. Of course, hurricanes and tropical systems tend to be fairly disruptive to freight markets when they hit some significant infrastructure. This doesn't feel or look a lot like some of the more disruptive ones. We'll see. Hopefully, that's the case. But then we also have had a big announcement in the term, in the form of CH Robinson acquiring the third largest broker in the United States, RXO. So we'll dive into that. But first up, DJ, before we get into some of the headline things and parse those apart, we had some economic updates this week. We've had trade balance stuff. We talked about trade balance last week. We heard Noy's article on Mexico and some of the value that's crossing the exchanges there. We can't sleep on Mexico, but I think the question that's on my mind with the data that we get moving forward is what are we seeing in terms of inflation? How is that impacting demand? You found an interesting article on this that I think is worth talking about. Let's get into it. Tell us what tariffs are doing for inflation and consumer prices.

DJ Donahue (1:46)

So, well, first off, I just want to say when it comes to the hurricane, I'm more concerned about the Alabama-Georgia game than anything.

Zach Strickland (1:51)

I think a lot of our audience might be as well. I know I don't want it to get washed out, but yes, I think when I was watching the Weather Channel, they were actually talking more about football disruption than they were any infrastructure.

DJ Donahue (2:04)

Well, it's not just there, but the president said he's going to be there one way or another, so we'll see what happens. But yes, back to the actual news. We had a big report coming out from the New York Federal Reserve on the impact of tariffs on consumer goods. And the long and short of is that when you look at year over year inflation, which the Federal Reserve prefers the PCE indicator for inflation, that the tariffs have had an impact on consumer spending prices.

So what you see here, and this is on the chart, the notes from the Federal Reserve says, it solidifies a 12-month change in consumer prices for 67 non-oil goods. So that's important. This does not include oil markets, it does not include the pain you're feeling at the pump right now.

The dashed line subtracts their estimate of the contribution of tariffs. So they have estimated how much tariffs are hitting prices, and taken away the effect on that. So what you see on that dashed blue line is the counterfactual. What we're seeing is that from this chart, that tariffs have impacted consumer prices by increasing them anywhere from about 2-3 percent, depending on the area. And it's interesting because without the tariffs, we actually would have seen prices go down relative to the spikes we saw in January 2022 in year-over-year differences. So the tariffs are having an impact and they are getting passed through to the end consumer. And so a lot of-

Zach Strickland (3:31)

And that's the point, is it not?

DJ Donahue (3:33)

Well, the point is, the end effect is without question what's going to happen, because at the end of the day, a tariff is a tax.

You may hear from people that it's like a policy tool. No, it's a tax. And the question is always from a matter of incidents, how much gets passed through to the end consumer.

Zach Strickland (3:51)

Right.

DJ Donahue (3:51)

Specifically, it's a tax on imports and whenever you have a good coming in, that 10% to 50% to whatever we're looking at gets slapped on it. And Uncle Sam gets to take a chunk of that.

Zach Strickland (4:03)

Well, the idea for a tariff, of course, the purpose of the tariff isn't to increase the price of goods. I should take that back. What I was trying to say is that it's to increase the price of foreign production so that our internal, like I think that my favorite example of this is tomatoes. Like when you have cheap, cheaply produced items that flood domestic markets, that then squishes out the internal production capabilities of that country. So we could no longer produce tomatoes, even if they were higher quality, the cheaper versions come in, flood the market, reduce the price to the point where American producers cannot grow them effectively or cost effectively enough to make money. So we're left with one country's tomatoes or other country's tomatoes in the space. So that removes our production. So in my mind, and correct me at any point, because I'm trying to keep this pretty concise and simple, I know that's more complicated.