“Get back to where you once belonged.”  So, the infamous Beatles song goes from there penultimate “let it be” album.  As the song plays all I can think is if only inflation could get back to where it once belonged.  The price of everything is up and all we want to know is when will things normalize.  That’s a noble question that no one knows; however, we can analyze the current environment and understand what caused it to begin with and when it might end.

Like most issues today the cause rolled in 2020.  The US and Governments around the world enacted large stimulus through monetary (Fed Reserve) and fiscal policy (Covid Relief).  The Federal Reserve purchased bonds, mortgages etc. all the while keeping interest rates at close to 0%.  This policy helped increased the Money Supply (M2) in the banking system while Congress transferred direct money to individuals and businesses.  The result is a massive amount of money that’s itching to go somewhere.

What’s this got to do with railcar pricing?  A lot!  Railcars are elastic—they are priced among other things on their cost to produce.  Railcars are 100% made of steel and the price of steel is up 125%+ year over year.  Or as another way to look at it is a 52” Gondola in 2020 was $77,000 is now $115,000+.  Within a very short time existing and new railcars jumped in value which has led to higher rental rates.  To be fair its safe to say this is the first time since 2015 or so rental rates have increased substantially above any nominal amount for rail equipment. This is a trend we’ve seen not just in gondolas, but also in covered hoppers, flatcars, and open tops. In other words, pricing is up across the board.

When will this end?  The Federal Reserve and other central banks around the world are raising interest rates and ending there quantitative easing (purchasing of securities) in the fight to stamp out inflation.  That noise you hear may not be the vacuum cleaner but the Federal Reserve trying to suck the money out of M2 (shown below) by raising rates and letting the securities purchased mature. https://fred.stlouisfed.org/series/M2SL .

It’s always darkest before dawn.  Inflation was 8.5% in March 2022—the largest increase since 1981.

The Beatles released the “Let it Be” album in 1970 which was a year after there last recorded album of “Abbey Road” in 1969.   “Let it Be” was supposed to be the last album but after recording the group wanted something more worthy and recoded “Abbey Road”.   It’s safe to say the “Abbey Road” album was a do over–Its something the Federal Reserve would like.

 

Leave a Reply