Red Sea Attacks Propel Shipping Costs, Threatening Prolonged Inflation

Terror incidents targeting commercial shipping in the Red Sea have caused shipping expenses to skyrocket by over 600% following the recent conflict between Israel and Hamas. This dramatic increase is starting to influence global inflation rates, potentially complicating the US Federal Reserve's strategies aimed at inflation control.

Soaring Shipping Costs

Amid overlapping crises, oil prices soared past $80 per barrel but eventually steadied at $78.29. Due to threats in the Suez Canal, shipping giants are rerouting their vessels around the Cape of Good Hope. This detour results in an additional $1 million in fuel expenses and an extra ten days travel time, reminiscent of the supply chain disruptions witnessed during the COVID-19 pandemic.

Highly respected economist Mohamed El-Erian expressed concern over these developments, stating that the current delicate state of the supply chain is suffering further shocks.

Impact on Global Trade

Asia-Europe trade routes are among the most affected, with the price to transport a 40-foot container jumping to $6,000, marking a staggering 600% hike since October. This surge, attributed to Houthi rebel attacks near the Suez Canal, has been dubbed a 'global contagion' with wide-reaching effects on shipping and ultimately consumer prices. Similarly, shipping prices from North Asia to the East and West Coasts of the US have increased by 137% and 131%, respectively.

Peter Sand, a chief analyst in the freight sector, warns that extended conflict could lead to even higher costs and more severe global shipping disruptions.

Business Disruptions

Several major importers, including Tesla, Volvo, and Ikea, have reported shortages or expect delays in receiving goods. Retailers are considering shifts in their marketing strategies due to these deficiencies. Additionally, companies like BDI Furniture are altering their procurement strategies to lessen reliance on Chinese manufacturing and avoid canal routes in favor of alternatives like Pacific Ocean crossings to California.

Inflation and Political Ramifications

The current situation poses a risk of prolonging inflation, which could impact the Fed's interest rate policies. It may also influence the borrowing costs for Americans and pose challenges for President Joe Biden's potential re-election efforts. Despite anticipation for rate cuts, renewed shipping cost hikes could impede the battle against inflation.

Recently, inflation rates continue to surpass the Fed's target, prompting analysts to project a slowdown in the reduction of global core CPI inflation.

As the conflict in the Red Sea persists, businesses, economies, and governments worldwide brace for the implications of these heightened shipping costs and their potential to exacerbate inflationary pressures.

shipping, inflation, conflict