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by Peyton Jack
Peyton Jack

5 min read

Explore the Effects of Inflation and Interest Rates on Freight Trends in 2024

April 29, 2024

Peyton Jack
by Peyton Jack

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Stubborn inflation and the uncertainty surrounding monetary policymakers’ response presents significant uncertainty for the U.S. economy and freight demand in 2024. In the last few weeks, Federal Reserve officials have rapidly changed their tone regarding potential interest rate cuts this year following April’s inflation report, which continues to show headline inflation has remained unmoved since June 2023. Since falling precipitously from June 2022’s 9.0% peak to 3.1% a year later in June 2023, headline inflation has since failed to fall below 3% in the past nine months. As of March 2024, it currently sits at 3.5%. Understanding inflation and monetary policy can help explain some freight trends we’ve observed in the Breakthrough ecosystem since 2023.

Analyzing the Impact of Interest Rate Expectations on Economic Behavior and Investment

During recent public comments, Federal Reserve Chairman Jerome Powell stated that “it’s appropriate to allow restrictive policy further time to work.” What “further time” means is an open question that market participants must decide for themselves. Data from the CME Group’s “FedWatch Tool” indicate that 2 weeks ago, futures market participants placed a roughly 60% probability of at least one Fed rate cut by their June meeting. As of the publish date, that probability now sits at just 17% percent. The value of interest rates significantly shapes economic outcomes, but the expectations for interest rates also have a profound impact on freight trends.

CME FedWatch Tool Interest Rate Probabilities.png

Expectations of future interest rate values tend to shape buying decisions in the present. A portion of consumers who held off large purchases anticipating lower financing rates may move forward with those purchases in the near-term, if they can afford it. Conversely, those who cannot afford financing will be priced out of the market for a longer period of time. Higher for longer interest rates not only exert pressure on consumption spending, but they also tend to restrict growth in gross public investment. Investment spending includes things such as real-estate purchases, renovations and expansions of current fixed assets, commercial machinery, and inventory holdings.

The chart below shows how interest rate hikes tend to be followed by periods of low and even negative growth in gross investment spending. As of Q4 2023, the last available quarter with data, real gross public investment spending grew 1.5% year-over-year but fell 1.2% in 2023 as a whole. This intuitive behavior makes sense: if the cost to finance a fixed-asset purchase increases, the amount of those purchases will decrease. This presents a significant headwind for freight demand as the two primary sources of demand for the movement of goods are consumption and investment spending.

Real Investment Growth and Interest Rates.png

Notable Freight Trends: Higher Interest Rates and Durable Goods Shipments

The decrease in investment spending, like real-estate purchases, may not fully mitigate stronger consumer spending. However, shippers of goods related to large capital expenditures will likely see a significant impact on their volumes due to higher interest rates. In the Breakthrough ecosystem, we see the unique pressure higher interest rates exert on shipments of durable goods as opposed to volumes in the ecosystem as a whole. A key freight trend we’ve observed since the beginning of 2023 is that year-over-year growth of durable goods shipments has trended in the opposite direction of the total ecosystem.

Breakthrough Shipments by Industry.png

Looking at broader freight trends, volume growth across the entire Breakthrough ecosystem has trended back towards positive territory as the effects of higher interest rates are somewhat muted by the need of consumers to purchase staple products. Meanwhile, durable goods shipments have declined on a year-over-year basis since rates reached their peak in the middle of 2023 and now sit roughly 9% below prior-year levels.

The Outcome of Higher Interest Rates on Freight Trends in 2024

The effects of higher interest rates on economic activity—and by extension freight volumes—occur over varied and difficult to predict time horizons. We expect higher interest rates will present a headwind to freight volumes through at least the end of 2024. This doesn’t imply that we will or will not experience year-over-year growth in volumes this year. However, Federal Reserve officials accurately qualify the current monetary policy conditions as “restrictive” to economic activity, and interest rate relief would be a welcome development for shippers across industries.

For more insights on freight trends and to better understand the multifaceted aspects of your transportation network, explore our suite of freight solutions. Leveraging our near real-time, shipper-transacted dataset of over $25 billion in annual transportation spend, we enable you to anticipate shifts in freight demand, adapt to changing market conditions, and make data-driven decisions that enhance efficiency and reduce costs.

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