Every week, two trucks pull up to Tony Liu’s loading dock, loaded with fresh produce, meat, and seafood.
Liu owns Grand Asia Market in Charlotte, N.C., as well as several local restaurants. Until a few weeks ago, he was paying about $2,000 a truck for his deliveries. But when he received a delivery quote just days after the U.S. started bombing Iran, the price had jumped 20%, to $2,400 a truck.
“It went up right when the war started,” Liu said.
Since the start of the war, the price of diesel has jumped by about 34%, one of the most rapid and significant spikes since the pandemic. The increase is the result of the near-closure of the Strait of Hormuz, which took about 20% of the world’s oil supply off the market, making this disruption far worse than in any previous Middle East crisis.
“We’ve never seen 20 million barrels per day taken off the market suddenly like this,” said Robin Mills, CEO of Qamar Energy, an energy consulting firm based in Dubai, where Mills is experiencing the war firsthand.
But while the costs of shipping and oil-based products are already rising fast, everyday American shoppers haven’t yet felt the price increase anywhere but the gas pump. That is because of the buffers in every layer of the supply chain, and in the ways businesses, depending on their profit margins, decide when to finally pass extra fees on to customers.
“Food, clothing, anything that requires shipment is not going to be as fast as actually paying for gas at the pump; that was immediate,” said John Donnellan, professor of Management at New Jersey City University. “I haven’t seen it specifically put on the consumer yet. It will go to the consumer.”
One reason higher prices won’t show up right away for consumers is that transport companies typically buy fuel as a commodity, locking in prices in advance through contracts.
“The fuel they are actually using right now is cheaper because it was likely purchased last year,” said Donnellan.
While an initial spike in oil prices acts as an immediate shock to the system,it takes one to three months for such a wave of inflation to fully work its way through the transport system and reach retail.
Every layer of the supply chain carries its own buffer. Most American retailers keep 20 to 40 days’ inventory on hand. Early in a crisis, businesses are essentially selling goods bought and shipped at the old, lower freight rates.
But when warehouse shelves run low and companies need to restock at the new, higher shipping costs, profit margins determine who ends up paying the bill.
“For something like food, I am sure they will pass the cost on because their margins are very little, like 1%,” said Yao Zhao, professor of supply chain management at Rutgers University. “If you suddenly add a surcharge of more than 1%, they will absolutely raise prices. Because if they don’t, they lose money, so they have no choice.”
Liu’s businesses show the difference. At his supermarket, prices can change with costs; he can simply put on a new sticker or a new shelf tag. His restaurants cannot do the same. A menu price, once printed, tends to stay a while.
“If the menu says $25, it’s $25,” said Liu. “Even if your costs go up, you can’t change it every day.”
For now, his restaurants are absorbing the higher costs. But his dry goods stockroom will need to be restocked in about two weeks. When that happens, prices will have to go up.
“When people are short on cash, they will still buy groceries to cook at home,” Liu said. “But they won’t dine out at a restaurant.”
That shift from dining out to cooking in will eventually impact the broader economy.
Kevin Cummins, chief U.S. economist at NatWest Markets Securities, cited a Federal Reserve rule of thumb: every $10-a-barrel rise in oil prices reduces the U.S. GDP by 0.4 percentage points over two years.
As prices for goods like gasoline rise, Cummins added, total retail sales figures before adjustment for inflation may appear to be growing, but they could mask a real decline in how much consumers are buying.
While the costs of logistical disruption are already affecting every level of the supply chain, a sense of business as usual persists, sustained by now-dwindling inventories.
“I don’t get the feeling that the average person on the street has really worked this out yet,” Mills said. “Firstly, you’ll get ‘demand destruction.’ Those who can’t or won’t pay the price have to go without.”
Liu has not yet raised prices. But the clock is ticking, and he estimates that he has about a month before he has to decide whether to raise prices or not.
“If we buy it expensive, we sell it expensive; that’s just how it is,” Liu said. “Ultimately, the ones paying out of pocket are the everyday people.”