The “Financial Times” has raised concerns that US strikes on Houthi targets in Yemen are stirring fears of a broader conflict in the Middle East that could lead to rising prices at a time when inflation appears to be receding.
According to the British newspaper, the Houthi attacks, which started in October last year, have resulted in a widespread diversion of shipping away from the Red Sea.
Economists had expected the impact of these attacks on commodity prices to be relatively contained, but the newspaper now reports rising concerns about the more severe indirect effects on essential goods, including oil if the US forces become more deeply involved in an escalating regional crisis since the “Tidal Wave of the Apex” operation launched by the Islamic Resistance Movement (Hamas) followed by the Israeli war on the Gaza Strip since last October.
Experts and researchers cited by the newspaper suggest global supply chains could experience increasingly severe disruptions if the crisis continues past the first half of the year.
What are the effects of the Houthi attacks so far?
The Red Sea is a vital trade route, accounting for 15% of global maritime trade, including 8% of the grains, 12% of the seaborne oil, and 8% of the liquefied natural gas.
Since the first Houthi attack on October 19 last year, Red Sea traffic has significantly diminished.
The latest monthly trade index released last Thursday by the Kiel Institute for the World Economy showed that after the Houthi attacks, container flows through the Red Sea were less than half the usual level in December and dropped to less than 70% of the usual quantities in early January, according to the British newspaper.
With ships rerouting around Africa—a detour adding between 7 to 20 additional days—shipping prices for a standard container from China to Northern Europe rose from about $1,500 in November to more than $4,000.
Some economies are already feeling the impact; Egypt is likely among them, given its reliance on shipping through the Suez Canal, which collected more than $9 billion in transit fees during the last fiscal year, adds the newspaper.
A number of companies report pressures, with Tesla’s factory in Germany halting production until February 11 due to a shortage of some components caused by extended shipping times around the Cape of Good Hope.
How serious is the disruption to the wider economy?
The disruption is significant enough for the United States and its allies to consider military action against the Houthis, as policymakers were pointing to the broader Middle East conflict as a “significant rising risk” to inflation, which is currently receding in major economies, according to the newspaper.
The newspaper adds that central bank governors are relatively optimistic about the macroeconomic consequences of current conditions, noting that shipping prices remain much lower than the peak of $14,000 for container shipping during the coronavirus pandemic.
Experts do not anticipate significant effects on consumer prices as shipping costs represent a small fraction of the value of high-priced goods like consumer electronics. Companies are also expected to learn how to manage their inventory and pricing for longer shipping schedules.
These experts believe that current inventory levels at firms should allow most to cope with longer shipping times, as a slowdown in consumer demand following a wave of interest rate hikes limits the companies’ ability to raise prices and pass on elevated shipping costs to customers.
Is the situation reassuring?
The newspaper cautions that the current situation “does not necessarily mean economic policymakers can be complacent”, citing analysts who say that the duration of the disruption could turn into a more significant problem.
Before the US strikes, consultancy firm Oxford Economics said that if the Red Sea remains closed to commercial traffic for several months, the increase in shipping prices could add 0.7 percentage points to annual consumer price index inflation rates by the end of 2024.
The newspaper also quotes Thomas Willeadik, Chief European Economist at T. Rowe Price, who says global shipping is under pressure due to drought in the Panama Canal, which could make the inflation threat more significant.
“Two of the world’s most important shipping corridors are affected at the same time, so shipping prices are likely to remain high for some time,” adds Willeadik.
What is the greater economic danger?
Analysts suggest the greater danger to inflation is that oil and gas markets fear a broader conflict in the Middle East.
Some of them believe that high levels of spare energy capacity, slowing demand, and strong supplies from outside the OPEC+ alliance have contained concerns about an oil supply cutoff so far. However, the recent rise in oil prices—following the US-led strikes that pushed crude prices above $80 per barrel—has heightened market concerns that the US response could signal further troubles ahead.
The newspaper concludes, “Lower energy costs have been a key driver behind the fall in inflation, so any increase would be a setback to central banks’ efforts to curb price growth.”
