Freight Costs and Domestic Prices During the COVID-19 Pandemic

How much do changes in the cost of international freight spill over into domestic inflation? Using Chilean customs data, we document that imports from Asia primarily explain the sharp increase in average freight costs observed during 2019-2021. We exploit the heterogeneous exposure of importing firms to this region to implement a shift-share instrument for import prices to estimate the elasticity of substitution between intermediate inputs from Asia and the Rest of the world. Using this estimate in a general equilibrium model with nominal rigidities, we calculate that the observed increase in freight costs accounts for 14% of the inflation for the 2019Q4-2021Q4 period.