Inflation Warning For 2024: Red Sea Disruptions Causing Freight Rate Spikes And Higher Costs

While the Federal Reserve‘s preferred measure of inflation is now close to its target range of 2%, the current turmoil in the Red Sea could give U.S. policymakers a few headaches in the coming months.

On Friday, data showed the headline rate of personal consumption expenditures, an inflation measure used by the Fed in setting policy rates, fell to 2.9% in November.

Some economists are predicting up to four quarter-point rate cuts in 2024 — that would take the Fed funds rate from its current range of 5.25%-5.5% down to 4.25%-4.5% by the end of next year. Are they being over-optimistic given the potential inflationary impact of the suspension of freight through the Red Sea?

Red Sea Traffic Re-Routed

An increasing number of attacks by Yemeni Houthi rebels have disrupted the Red Sea/Suez Canal corridor.

The shipping route accounts for around 12% of global trade and nearly a third of container shipping. It carries freight from Asia and petroleum products from the Arabian Gulf to destinations in Europe and Eastern U.S. ports.

Many freight companies, including oil tankers and those carrying container goods, have now stopped using it.

The alternative route — around the Cape of Africa — adds 3,000-3,500 miles and an additional 10 to 14 days. It has already driven up freight rates to highs not seen since the Covid-19 pandemic. That’s likely to have an impact on the price of goods they carry.

Shipping company Maersk AMKBY confirmed a surcharge of $700 on a standard 20-foot container.

Many other shipping companies have since followed suit.

“For shippers and eventually also for consumers, 2024 starts with higher than expected freight rates,” said Rico Luman senior economist at ING. But will this translate into higher prices?

Also Read: End-Of-Year Rally For Oil As Red Sea Tensions Drive Up Shipping Costs

Oil Prices Rise For Two Straight Weeks

Oil prices have already responded. Since BP BP is suspending oil shipments through the region. As a result, the price of Brent crude has risen by around 4.6%.

The United States Oil Fund USO, an exchange-traded fund (ETF) that tracks the price of light-sweet crude, was up 0.9% at $69.68 on the day and up 2.8% over the week.

But it’s not only the higher freight rates that could have an impact on inflation. The delays caused by the extra distance of shipping goods around Africa could cause temporary bottlenecks in supply chains.

“Companies have started avoiding the Red Sea and this already leads to significant delays in supply chains and prices hikes on the spot market — and it could still get worse,” added Luman.

IKEA is just one of many companies warning that higher freight rates will affect product availability and prices.

An Ikea spokesperson said this week: “The situation in the Suez Canal will result in delays and may cause availability constraints for certain IKEA products.”

Logistics experts interviewed by CNBC expect that once the timeline hits the one-month mark, inflationary pressures will be felt in the supply chain first; then, ultimately, by the consumer.

The impact of delays and higher freight prices will be largely felt in Europe. The continent relies more heavily on oil shipped from the Arabian Gulf.

The U.S. should feel any inflationary impact far less due to its diverse economy. It is also broadly self-sufficient in goods, and agricultural commodities, as well as oil.

Now Read: UK On The Brink Of Recession While US Growth Remains Robust: Fed Doves To Drive Markets In Early 2024

Image: Shutterstock