Markets appear to be almost completely oblivious to the prospect of increased inflation in the months ahead.
As a result of the Houthi’s attacks on commercial shipping, the Red Sea is now practically closed. Between January 4th and 11th last year, more than 200 container ships travelled through the stretch of water, but in the same week in 2024, only 122 made the same journey. Global container firms which usually account for 95% of the shipping traffic in the region have now completely suspended services in the Red Sea.
This is a huge problem when it comes to the price of essential commodities such as oil and other goods. In the first half of 2023, approximately 12% of all seaborne-traded oil passed through the Red Sea and Suez Canal. Billions of dollars’ worth of cargo are now being rerouted around the Cape of Good Hope, significantly pushing up freight costs and adding 40% to the journey time for a trip from Shanghai to Rotterdam.
As Tesla in Germany has already found out, this is inevitably going to lead to a shortage of goods. A 40% longer journey time equates roughly to 40% fewer goods. Presuming demand for those goods remains unchanged, higher demand and diminishing supply, along with higher freight costs, is going to lead to price rises – inflation.
It really is that simple. The economist Andreas Steno Larsen, CEO of Steno Research, has established that there is an almost direct correlation between international freight rates and goods inflation – with a five-month delay. In other words, whenever shipping costs start to spike, inflation follows a matter of months later:
This means that markets around the world are very likely to be facing higher inflation within months. Interest rates will therefore have to remain higher for longer. Central banks are at risk of being blindsided by inflation again, with the Bank of England still suggesting that rates could fall this year, and expectations growing that the European Central Bank (ECB) will similarly cut rates in the second quarter.
It is extremely likely that both central banks will have to conduct rapid U-turns or see another huge dent to whatever remains of their credibility.
Author: Harry Clynch
#Inflation #InterestRates #CentralBanks #RedSea #Geopolitics
