The strike at East and Gulf Coast ports could pose a challenge for the Biden administration.

• President Biden has stated that he will not interfere to compel striking ILA union workers to return to work at East and Gulf Coast ports, a decision that reflects a political calculation aimed at maintaining the strength of unions prior to a tight election while also addressing economic concerns, which is a top priority for many voters.
• Since the strike began, Transportation Secretary Pete Buttigieg and Acting Secretary of Labor Julie Su, along with Biden, have focused more attention on the ocean carriers and "price gouging."
• If the union succeeds in its fight for a significant wage increase, there is a possibility of a resurgence of inflation, which could disrupt the Fed's successful efforts to control inflation. However, recent Fed concerns have centered more on the possibility of a labor slowdown rather than booming conditions.

President Biden and his administration are not invoking the Taft-Hartley Act to compel International Longshoremen's Association dock workers to return to work at East and Gulf Coast ports where a strike has been ongoing for two days, a decision that reflects the strength of unions one month before the election but may jeopardize progress on the economy, which is a top concern for many voters.

The rhetoric of Cabinet Secretaries, including Transportation Secretary Pete Buttigieg and Acting Labor Secretary Julie Su, has intensified in recent days, accusing ports ownership and ocean carriers. However, there is a significant risk associated with the political decision-making process: wage increases that benefit workers but ultimately lead to higher prices for consumers both domestically and internationally.

The ports strike has resulted in a massive trade shutdown, leading to supply chain congestion and delays, which can result in higher prices being passed along to consumers. However, maritime and business experts are also warning about the risk of persistent wage inflation making its way into supply chain prices, which the Federal Reserve has recently been successful in taming.

Lars Jenson, CEO of Vespucci Maritime, stated that the wage increase would be passed on and eventually paid by importers. He explained that the inflationary impact would vary depending on the value of the goods inside the container, with agricultural exporters experiencing an even bigger impact.

The ILA's president Harold Daggett is seeking a raise of up to $5 per hour, per year, over a six-year period in a new contract for union port workers in a labor battle with the United States Maritime Alliance. The USMX, which represents port ownership, last offered what it described as a nearly 50% wage increase over six years on Monday, an offer rejected by the union. The USMX reiterated that offer on Tuesday, stating that its "current offer of a nearly 50% wage increase exceeds every other recent union settlement, while addressing inflation, and recognizing the ILA's hard work to keep the global economy running."

The ILA president stated that the USMX fails to acknowledge that many of their members operate multi-million-dollar container-handling equipment for a mere $20 an hour. In some states, the minimum wage is already $15. Additionally, the ILA president pointed out that two-thirds of their members are constantly on call, with no guaranteed employment if no ships are being worked. Their members qualify for benefits only based on the hours they worked the previous year, making them vulnerable if there's a downturn in work.

On Tuesday morning, CNBC reported that the ILA is requesting a 61.5% wage hike, as stated by Daggett.

With the union and port ownership group unable to reach an agreement, ocean carriers, including CMA CGM, have taken measures to safeguard their financial stability during the strike. As of October 1, 2024, CMA CGM has declared force majeure and may charge additional operational costs to cargo on the water for vessels delayed due to the strike at a U.S. East or Gulf Coast port of discharge.

On Tuesday, President Biden announced that his administration will closely monitor any price gouging activities by foreign ocean carriers, including those on the USMX board. He also pointed out that foreign ocean carriers have experienced record profits since the pandemic, despite the risks taken by Longshoremen to keep ports operational.

Ocean carriers typically experience higher profits due to increased freight rates and fees during port shutdowns. Analysts predict that ocean spot rates could increase by 20%-50%. UBS anticipates that 20% of Maersk's total volume will be affected by the USMX strike. If freight rates increase by 30% over two quarters, UBS estimates that a revenue tail wind of more than $1 billion will be generated.

On Tuesday, Buttigieg stated that the DOT is monitoring any attempts by companies to increase prices opportunistically, including ocean shippers, and urged them to withdraw surcharges. He emphasized that no one should take advantage of a disruption for profit. The Federal Maritime Commission will use the expanded authority granted by Biden to ensure that any fees charged are legitimate and legal.

If the ILA successfully negotiates a deal, economists predict that even more significant price hikes will occur, despite the fact that the strike involves only around 50,000 workers in a U.S. labor market that employs over 100 million people. This is happening amidst other union battles across the U.S. economy, including aviation and automakers. According to Larry Lindsey, CEO of The Lindsey Group, the scale of wage demands at the ports, at Boeing, and at autoworkers makes it difficult to believe that the labor market is soft and that wage inflation is dead.

Julie Su, the acting secretary, criticized the proposal that U.S. exporters and importers would bear the brunt of labor wage increases.

"Secretary Su stated in an interview that while we were urging them to present a fair offer to prevent disruption, they were simultaneously calculating the maximum surcharge they could charge for shipping due to a strike. This, he said, was an outrageous stance."

Major industries from retail to manufacturing and agriculture have been urging Biden and his administration for months to intervene in the ongoing labor dispute between the International Longshoremen's Association (ILA) and the United States Maritime Alliance (USMA). Now, with the president maintaining that collective bargaining is the only solution for a "fair deal," executives across the economy are considering the potential pricing impacts on their business models.

"According to Peter Friedmann, executive director of the Agriculture Transportation Coalition, any logistics rate increases would make U.S. agriculture exports less competitive in the global marketplace. As the cost of moving containers through U.S. ports continues to rise, foreign customers will increasingly look to other countries to meet their food, farm, and fiber needs."

Julie Su, the acting Labor Secretary, expressed her understanding of the business community's concerns while maintaining the administration's stance. She emphasized the importance of a good resolution and the impact it has on American workers, businesses, and consumers.

The Federal Reserve is now more focused on the labor market than inflation and has started reducing interest rates to adjust its monetary policy in an effort to prevent job losses and anticipate a return of inflation to 2%, as recent data suggests. In the August nonfarm payrolls report, average hourly earnings increased by 0.4% on the month and 3.8% from a year ago, both higher than expected. The September nonfarm payrolls report will be released this Friday, and in the short term, the ongoing union battle could impact the data on both wages and layoffs.

On Wednesday, the ADP private payrolls report showed that while hiring increased, pay growth continued to decline. The annual gain for those remaining in their jobs decreased to 4.7%, while it fell even more for job switchers, to 6.6%, down 0.7 percentage point from August. The upcoming nonfarm payrolls report, the last the Fed will receive before its next interest rate policy decision in November, could include downward pressures in the labor market due to both layoffs related to the strike and Hurricane Helene.

Jim Bianco, head of Bianco Research, stated on CNBC's "Fast Money" on Tuesday that this would only make things more complicated for the Fed as they won't be able to accurately gauge the economy's performance due to a lack of read.

According to Peter Boockvar, the wage increase being sought by the union will indicate that wage growth will not return to its pre-Covid trend of 2.5%, but will instead settle at approximately 4%. This will establish a floor under inflation.

"According to Boockvar, after the disinflation process is complete, which is mainly affecting goods, the normalized inflation rate will be around 3-4%. Additionally, when the wage deal is reached, it will cause goods prices to increase."

The collateral damage to those dependent on functioning ports for their livelihood is often underestimated by those watching from afar, according to Alan Baer, CEO of logistics firm OL USA.

Steve Lamar, CEO of the American Apparel and Footwear Association, emphasized the importance of the Biden Administration utilizing all available tools, including its Taft-Hartley authorities, to maintain negotiations, keep ports open, and ensure efficient movement of goods. He warned that allowing the current situation to continue could lead to harm to the industry and the U.S. economy, including job losses, higher prices, and goods shortages.

—Reporting by CNBC's Jeff Cox contributed to this article.