A sharp rise in global freight and shipping costs threatens to reverse recent falls in inflation, economists have warned, amid violent disruption to transit routes in the Red Sea and the Suez Canal.
The world’s largest shipping companies and oil companies have been forced to abandon a key trading route in the Middle East and to divert cargo to cross Africa after Iranian-backed Houthi rebels attacked maritime convoys in the region in protest at Israel’s military attacks in Gaza.
The security threat has created a choke point in one of the world’s most important trading routes, leading companies to scramble to secure access to shipping containers, raising freight costs and threatening a spillover into inflation of the kind last recorded during the Covid-19 outbreak.
Supply chain disruption and rocketing shipping costs forced up goods price inflation in western economies at the height of the pandemic and now are threatening to return just as many countries begin to recover from painful inflationary episodes. The International Monetary Fund estimates that global core inflation has been raised by one percentage point by pandemic-related bottlenecks over the past two years.
Sarah Breeden, a deputy governor of the Bank of England, said the central bank was vigilant to the risks of a new source of global inflationary pressure because “supply constraints can really matter for monetary policy. We have developed a tool kit to track supply constraints for our inputs on what is happening [in global trade]. Given events in the Red Sea, we can incorporate those into our expectations. It is a volatile situation that is only just arising, but we have highlighted and incorporated in our latest projections the upside risks to inflation from developments in the Middle East.”
About 30 per cent of all global shipping volumes travel through the Suez Canal, a vital artery for trade between Europe and Asia. A six-day disruption caused by a blocked ship in the canal in 2021 caused freight costs to rise by more than four times historical averages.
The Red Sea turmoil has coincided with the worst drought in 60 years in the Panama Canal, another of the world’s key shipping routes. The combined disruption risks pushing up inflation through two channels: a rise in global oil and gas prices; and a broader increase in the cost of international freight, which could affect goods and food prices.
Oil and gas prices have increased by 7 per cent in the week before Christmas and global freight costs could soar by up to 55 per cent for some energy tankers, according to estimates from Goldman Sachs. Shipping delays of up to 50 per cent are expected for freight travelling from Asia to Europe that is forced to reroute to avoid the Suez Canal, Fitch Ratings said.
Maartje Wijffelaars, a senior economist at Rabobank, warned that inflation in the eurozone had climbed by threepercentage points over 2021-22 because of international trade disruptions, which could re-emerge now. “The risk of a new round of cost-push induced inflation has increased substantially,” she said.
Central bankers have spent the year warning of the prospect of new sources of inflationary pressure even as prices growth has begun to drop significantly in big economies. A sharp drop in oil and gas prices, coupled with a normalisation of international supply chains, have driven inflation down this year.
Diane Swonk, chief economist at KPMG in the United States, said: “Supply chains are much more fragile [after the] pandemic. The inflation we saw during reopenings was due to a collision of supply and demand shocks. This is one of many reasons that central bankers are predicting a much slower descent on interest rates.”
