How the Red Sea Conflict Could Reshape Global Inflation Dynamics

Feb 8, 2024 8:43:46 AM

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:

  1.    The shipping cost spike isn’t happening alongside factory shutdowns or a surge in global demand, which is what happened at the tail-end of the Covid pandemic when goods inflation soared.  In other words, the Red Sea shipping delays will not likely disrupt global production capacity, which was significantly curtailed in China and Southeast Asia in response to the pandemic. 
  2.    International transportation costs account for a very small share of the final consumption cost of goods, roughly 1.5% on average.  Sea freight accounts for even less at 0.7%.  A recent Goldman Sachs analysis found that a 100% increase in sea freight cost would only raise the overall core inflation rate by 0.1%. 

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

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