Red Sea crisis and inflation: new flare-up coming?

Noacceleration eggs of inflation in sight? The tensions on the market are worrying investors Red Sea, “through which it passes approximately the 15% of global maritime traffic,” he explains Giacomo Calef, Country Head Italy, NS Partners underlining that “since October 19, the day of the first attack by the Yemeni Houthi militia, the number of ships passing through this crucial passage has dropped dramatically, with a volume that at the beginning of January was 66% compared to normal”.

Inflation, a new flare-up in sight?

“The shipping companies – continues Calef – are in fact diverting their convoys towards West Africa, bypassing the Suez Canal and rounding thethe Cape of Good Hope, a detour that adds 7 to 20 days of sailing and about a million dollars in fuel costs. The effects are therefore clear, especially with regards to a possible rise in prices. Maritime freight rates for the Shanghai-Rotterdam route also shot up, rising from $1,500 in November to the current $4,000.”

“Furthermore, the attacks have reduced the availability of some goods, such as automotive components, which caused a production stop at the plant Tesla of Berlin at least until next February 11th. Last but not least, Egypt fears economic repercussions: the toll for transit from Port Said to Suez, which in 2023 brought in more than 10 billion dollars and remains a fundamental source of revenue for the country, could be significantly reduced, creating possible internal instabilities”.

Limited risks

In light of all this, he explains Calef, “the risk of an escalation of the situation is concreteor even if, paradoxically, inflation may not experience major upward shocks. Freight rates have risen significantly, but remain far from $14,000 observed during the pandemic.”

“Furthermore, transport costs only count for a very small part of the overall value of some goods which weigh heavily in the calculation of the CPI (Consumer Price Index). Despite this, it is clear that the prolongation of tensions in the area would lead to an isignificant increase in inflationaccording to experts quantified at 0.7% by the end of 2024″.

But tensions could weigh

“The situation could also revise traders’ expectations regarding interest rate cuts by central banks. At the moment, in fact, traders expect six cuts starting from March as regards the Fed, although the next few weeks will be crucial to understand whether these expectations will be completely scaled down”