Shipping Costs Skyrocket Pass-through to Producer Prices During Crisis

Researchers at the Federal Reserve Bank of Atlanta and Boston have found that shipping costs pass through to US producer prices in varying degrees, depending on market conditions. In normal times, this pass-through is negligible, but during the COVID-19 pandemic, it surged roughly tenfold as costs rose across many routes simultaneously.

The study linked confidential census trade records to Bureau of Labor Statistics producer-price microdata for 6,000 US manufacturers from 2005 to 2022. Using local projections and Bartik-style instruments based on route-level shipping-cost variation, the researchers found that pass-through to producer prices is largely absent in normal times but increases dramatically during periods of crisis.

The authors interpret this state dependence through a menu-cost model with imported intermediate inputs and endogenous substitution between imported and domestic inputs. This implies that firms adjust their pricing strategies in response to changes in shipping costs, particularly during times of crisis when costs are rising rapidly.