While the Red Sea accounts for 12% of global maritime trade and shipping costs have soared 350% due to the recent Houthi attacks on international shipping, market-based indicators of inflation are not signaling a chronic resurgence in inflation because of the turmoil.
Forward-looking inflation measures remain well anchored at 2.3% to 2.7%, looking 1-3 years out, compared to spikes of over 6% in the wake of the Covid pandemic and the Russian invasion of Ukraine in Feb 2021.
Two strong arguments against the Red Sea conflict becoming a “game changer” for inflation are:
Another key point is that since the start of the Houthi attacks in October 2023, oil prices have actually fallen almost 20% to $75 per barrel. There are several reasons. US crude oil production has been increasing, reaching a record high of over 13.3 million barrels per day in December of last year. OPEC has over 4 million barrels per day of shut-in oil production capacity in Saudi Arabia, Kuwait and the UAE. Those three countries have shown a willingness to increase supply during times of disruption over the past 25 years, such as after the 2001 terrorist attack on the World Trade Towers. Finally, analysts believe that the Houthis are unlikely to expand their Red Sea attacks into the more critical Strait of Hormuz, through which about 20% of the world’s oil flows. That would be too damaging to Houthi ally Iran, which exports through the Strait.
For a deeper dive into the analysis and the broader economic implications of the Red Sea conflict, please refer to the recently published article on IBTimes.
*Data sourced through Bloomberg
