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Red Sea turmoil has sent shipping costs surging 150%, which will push inflation higher, Fitch says

A ship transits the Suez Canal towards the Red Sea on January 10, 2024 in Ismailia, Egypt.
A ship transits the Suez Canal towards the Red Sea on January 10, 2024 in Ismailia, Egypt.Sayed Hassan/Getty Images
  • Red Sea attacks have caused shipping costs to rise over 150%, Fitch Ratings said.

  • This could lead to a jump in core inflation, the agency forecast.

  • It's another challenge to the difficult last mile of getting inflation back down.

Disruptions to shipping lanes in the Middle East will mean that the final mile of inflation reduction won't be smooth sailing, Fitch Ratings reported on Monday.

Since late 2023, cargo ships passing through the Red Sea have faced attacks from Houthi rebels, a Yemeni group carrying out these assaults in protest over the Israel's war against Hamas in Gaza. This has resulted in a surge of over 150% in shipping costs so far this year, which could add 0.5 percentage points to core inflation, the rating agency forecast.

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"These increases are likely to be reflected in rising import prices in the coming months, and longer shipping times will reduce supplies of intermediate inputs and consumer goods. The outlook for shipping costs is uncertain, but a plausible scenario is that they will remain high for several quarters," Fitch wrote.

As cargo lines reroute their vessels, the weight of higher costs won't be immediately apparent in inflation metrics. The effect takes eight to 10 months to appear in the consumer price index, though import prices reflect these costs within two months.

"This points to a 3.5pp increase in US import price inflation by end-2024. We then constructed a model for US core goods inflation based on import prices and the NY Fed Global Supply Chain Pressure Index (GSCPI) and assumed the latter rises modestly," Fitch rote. "This indicates a rise in US core goods inflation of about 1.5pp, which would equate approximately to a 0.4pp addition to US core CPI inflation."

Economists have long warned that the final stretch of reducing inflation to a central bank's target rate could prove the most challenging.

In the US, a surprising to the upside in January's inflation report has dampened hopes of imminent interest rate cuts. Yet others worry that the Federal Reserve's reluctance to loosening monetary policy could eventually cause economic fallout, and trade disruptions don't make the central bank's decision any easier.

But while rising shipping costs add another layer of difficulty, this won't be a repeat of 2021, Fitch outlined. That year, pandemic pressures wrought havoc on supply chains, while demand for goods and manufacturing inputs surged.

Cited estimates from the International Monetary Fund suggest inflation rose 1.5 to 2 percentage points from freight costs alone that year. This time, however, goods consumption is growing moderately, while broader supply chains are not nearly as constrained, Fitch said.

Read the original article on Business Insider