Rail Contracts: Preparing for Rapid Inflation
Prepare for the Impact of Rapid Inflation on Rail Rates and Escalation in Rail Contracts
Rail contract escalation provisions will be impacted by big changes taking place in the overall economy, as well as changes occurring in the rail industry. The railroad index frequently used to escalate rail contracts is titled: All Inclusive Index Less Fuel. This index is frequently referred to as “A-List.”
Illustration 1 tracks the percent change in the A-List index against the change in the CPI since Q1 2012.
The illustration above shows very moderate increases for both the A-List and CPI indexes through the end of 2020.
The average annual increase in overall inflation, as measured by the CPI, was only 1.6% between 2012 and 2020. Inflation in the railroad industry was even lower as the average annual increase in the railroads A-List index was only 1.3%.
In 2021 the world changed dramatically for inflation in the economy as well as the railroad industry. The inflationary increases in 2021 are the largest the U.S. has experienced since the early 1980’s. This will have a big impact on railroads and rail shippers in the coming months.
To zero in on the changes taking place in 2021, Illustration 2 tracks the changes in these indexes from Q4 2020, to the most current time period available for each index. The A-List index is published quarterly and is always projected out one quarter. This means it is available through Q3 2021, while the CPI is available through June 2021.
Illustration 2 shows that the A-List increased 6.5%. Roughly half of this increase occurred between Q2 and Q3 of 2021. The CPI increased 4.5% and is expected to have large increases for at least the rest of this year.
If the 2021 changes in the CPI and A-List indexes are annualized,
they would have a rate increase of close to 9%.
This type of inflation has not been seen since the 1980’s and this will likely have a big impact on rail rates and the escalation provisions of multi-year contracts. How rail shippers address this will have a big impact on their cost of rail freight.
Escalation Consultants is in a unique position to assist shippers on this issue as we have been active in:
Developing escalation provisions for company’s contracts for over forty (40) years and
Resolving pricing issues with contract escalation problems that created big winners and losers.
With rapid inflation contract escalation provisions can easily create big winners and losers. For example, in the 1980’s and 1990’s Escalation Consultants helped resolve contract escalation problems where hundreds of millions of dollars were at issue in long term contracts.
We learned that:
With rapid inflation, a contract must have an effective process for insuring that the escalation provisions don’t generate big winners and losers; and
It is much less expensive to develop escalation provisions properly at the inception of a contract, than to try and resolve disputes after the magnitude of an escalation problem is already known.
Before agreeing to escalation provisions for your contracts, Contact Escalation Consultants to explore the option that best suits your company’s unique shipping needs. This will likely save you significant time, frustration, and money.
Escalation Consultants, Inc. developed the Rail Cost Control (“RCC”) program to help shippers reduce rail expenses by managing costs and empowering negotiations. For more information about RCC and other related articles, visit the RCC Blog.