What the Red Sea crisis could mean for inflation

• Recent attacks on several vessels by Houthi rebels in the Red Sea are limiting maritime traffic through the Suez Canal and leading to renewed disruptions to global supply chains as wait times and shipping costs increase.
  
  
• The conflict poses a risk to global trade as the Suez Canal is a vital artery of global trade flows with around 15% of global trade and 25%-30% of global container shipments transiting through this waterway. 1 It also raises concerns about a revival of global inflation pressures as importers face surging shipping costs.
  
  
• With demand for manufactured goods subdued and supply chain bottlenecks mostly resolved, we believe the current situation is unlikely to be a repeat of the pandemic supply shocks. But the ultimate impact will hinge on how long the conflict lasts and whether it escalates.
  
  
• For now, we don’t expect the situation in the Red Sea to substantially alter the outlook for global inflation and global monetary policy this year. However, we estimate a prolonged conflict with shipping costs staying as high through 2024 could add up to 0.7 percentage points (ppt) to global inflation this year. 

Following attacks on commercial vessels in the Red Sea, some of the world's largest shipping companies are avoiding the Suez Canal and rerouting their ships around Africa's Cape of Good Hope, delaying shipments and raising transportation costs – transiting the Cape of Good Hope route requires about 10 additional travel days. The disruptions have exacerbated existing challenges to global shipping as the Panama Canal – another key artery for global trade – is grappling with a severe drought that is restricting transit capacity.
 

Ocean freight rates have gone up rapidly following the Red Sea disruptions. The global Freightos Baltic Index (FBX) – which tracks global daily rates per 40-foot container – has more than doubled since late December and reached $3,411 in late January. And the rate of a journey from Asia to Europe has more than tripled to $5,456 over the same period, though this is still well below the record highs of early 2022 when prices increased tenfold. While ocean shipping rates have trended higher, bulk rates have seen only a modest increase so far. The Baltic Dry Index (BDI), a key indicator of bulk shipping rates, has climbed 12% since mid-January but remains well below its December 2023 peak of $3,346.
 

The additional cost pressures generated by higher shipping costs could lead importers to raise their prices and in turn pass these higher prices onto domestic consumers – a risk to the inflation outlook. While there is much uncertainty surrounding the effects of these disruptions, research from the International Monetary Fund shows that a doubling of global shipping costs can raise global inflation by 0.7ppt over the next 12 months with the effect building gradually. However, the impact will likely be smaller in the current episode as freight rates were relatively low at the onset of the disruptions. The impact can also vary across economies, with those less reliant on imports such as the US economy likely to see a smaller inflation pass-through.
 

In this instance, the impact on North American supply chains will likely be smaller than on European ones, but the constrained traffic through the Panama Canal could simultaneously pressure trade from Asia to the US East Coast. In terms of goods most at risks from the Asia to Europe route, consumer products, apparel, furniture and household appliances could experience the greatest disruptions. Chemicals, flat-rolled steel and automotive equipment could also be constrained.

While the impact will depend on how long and how severe the disruptions prove to be, we believe the situation is unlikely to be as severe and damaging to the supply chains as the pandemic-induced disruptions for now. The current balance of supply and demand in the goods market is less strained than in the aftermath of the pandemic; ports are not congested; and there is more freight capacity available than during the pandemic, which could help limit the upward pressure on container rates.