Attacks On Shipping Threat To Global Disinflation

Supply chains and shipping costs are back in focus given rising tensions in the Red Sea, a vital shipping route between Asia/Middle East to Europe through the Suez Canal. 12% of global shipping goes through the canal. Increased risks in the area have meant that half of the Red Sea’s container traffic is finding alternative routes and also some tankers, but longer journeys will add to costs and delivery times. Shipping and insurance rates have already risen adding to global inflation risks.

• Currently the geopolitical tensions in the Red Sea, including an Iranian warship being sent to the area, have had little impact on oil prices given excess supply concerns. The route is very important for oil and gas though and a deterioration in the situation could boost energy prices.
• The Baltic Freight Index, which measures the cost of shipping dry bulk goods over 20 routes for four sizes of ships, rose sharply in December and is now up 65.8% y/y. It shrank in annual terms from April 2022 to September 2023. Higher shipping costs are likely to add to global inflation pressures at a time when it hasn’t yet returned to target in many countries.

• The significant diversion of shipping to other longer routes is also likely to add to supply-chain pressures. The Federal Reserve of New York’s global supply chain pressure index had already moved into positive territory in November for the first time since January and is likely to rise further given the issues in the Red Sea and drought impacting volumes through the Panama Canal.

Source: MNI - Market News/Refinitiv