Red Sea Tensions Risk Significantly Higher Inflation

• Elevated shipping costs as a result of ongoing tensions in the Red Sea could impede the global fight against inflation, the Organization for Economic Co-operation and Development (OECD) said Monday.
• The Paris-based group estimates that the recent 100% rise in seaborne freight rates could increase import price inflation across its 38 member countries by nearly 5 percentage points if they persist. This could add 0.4% to overall price rises after a year, they added.
• In late 2023, major shipping firms began diverting their vessels away from Egypt’s Suez Canal, the quickest trade route between Europe and Asia, due to a spate of attacks by Iran-backed Houthi militants based in Yemen. Tensions remain high, with the navies of countries, including the United States, involved in the conflict.
• Ships are taking the longer Cape of Good Hope route around the southern coast of Africa, which increases journey times by between 30% and 50%, taking capacity out of the global market.
• However, the OECD also notes that the shipping industry had excess capacity last year, a result of new container ships being ordered, which should moderate cost pressures.
• Clare Lombardelli, chief economist at the OECD, told CNBC on Monday that a sustained increase in inflation as a result of the latest crisis is a risk, but not the group’s base case.

(Source: CNBC)