As a result of energy costs falling from record highs, inflation in the United States and other major economies has slowed down significantly during the course of the past year.
Nevertheless, the fight to bring rising prices under control has not yet been won, and the possibility that inflation could surge once more is growing as a result of the continued disruption of one of the most important trade routes in the world.
Many container ships, oil tankers, and bulk carriers that transport raw materials have been forced to take a longer route across Africa as a result of attacks in the Red Sea by Houthi terrorists that are supported by Iran. This has resulted in an increase in the price of shipping and insurance.
“I do think that there is a level of complacency in the financial markets in respect to the inflation outlook,” Sergio Ermotti, CEO of UBS, said on Wednesday at the World Economic Forum in Davos, Switzerland. He cited higher shipping costs caused by assaults in the Red Sea, which were likely to translate into higher costs for goods. Ermotti was speaking about the outlook for inflation.
It is hard for me to believe that inflation will not be affected by that, he said.
In December, headline inflation in the United States, Europe, and the United Kingdom all nudged upward, even before the increase in freight rates had time to flow through to consumer prices. This occurred in all three regions. The recent higher movements have brought to light the fact that bringing inflation back down to 2%, which is the rate that the Federal Reserve and other major central banks have set as their target, may not be as easy as it seems.
However, it is far too soon to declare triumph (with regard to inflation). According to statements made by the governor of France’s central bank, Francois Villeroy de Galhau, this week in Davos, the task at hand is not yet over.
Gita Gopinath, the deputy managing director of the International Monetary Fund, made comments that were similar to those that these individuals made. It was brought to her attention that the markets were anticipating that central banks will flip from gradually increasing interest rates to decreasing them “pretty rapidly.”
In response to it, she stated, “I believe that it is a bit premature to draw that conclusion.”
Several bankers and chief executive officers urged policymakers against decreasing interest rates too fast at the annual event that took place in the snowy Alpine ski resort. This was due to the fact that there are a myriad of factors that might cause inflation to increase.
The fragmentation of supply chains, trade protectionism, climate shocks, and armed conflicts are all examples of what Gopinath refers to as “upside risks to inflation.”
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The president and CEO of the asset and wealth management division of JPMorgan Chase, Mary Callahan Erdoes, issued a warning about a different, more subtle risk. According to her, “people start spending more as soon as central banks begin lowering interest rates,” which means that they feel better physically. “You are able to experience an increase in inflation in an instant.”
Central bank officials in both Europe and the United States have been raising their voices in opposition to the prevalent belief among traders that rate cuts are on the horizon.
Christine Lagarde, the President of the European Central Bank, stated on Wednesday that it is quite likely that the bank will only reduce interest rates during the summer, but that “there is still a level of uncertainty.”
In an interview with Bloomberg TV, she stated, “I am confident that we have reached a peak (in interest rates),” given that there has not been another huge shock. She went on to say that the central bank must now maintain high interest rates “for as long as necessary” in order to put inflation firmly on the road that will lead it back to 2%.
Middle East Inflation risk
The escalating bloodshed in the oil-producing Middle East, where tensions are running high as the Israel-Hamas war continue to rage, could be the source of yet another jolt to inflation.
An extraordinary escalation of hostilities between the neighbors has taken place in recent days, with Iran and Pakistan carrying out strikes on one other’s territories of their respective countries. More than sixty Houthi sites were attacked by United States and British forces in Yemen last week. President Joe Biden stated that this action was a direct response to the threat that was posed to the “freedom of navigation” in the Red Sea and the Suez Canal, which is adjacent to their territory.
Even though there have been conflicts, the prices of oil and gasoline have barely moved, and the prices of natural gas have decreased. This is because the demand for these commodities has decreased, and there is a large supply of them.
Even if a probable increase in the cost of energy is by far the most significant threat to inflation, there is still the possibility that shipping delays and a persistent increase in freight costs could be problematic.
According to PortWatch, a platform that was established by the International Monetary Fund and Oxford University, the amount of daily traffic that passes through the Suez waterway has dropped to its lowest level since March 2021, when a vessel known as the Ever Given closed the waterway for a period of six days.
According to data provided by Drewry, a shipping consultant based in London, container shipping rates along many of the world’s major trade routes have increased by a factor of two during the middle of December. In some instances, these costs have even increased by a factor of three.
If these expenses continue to be elevated, they have the potential to produce a little increase in global inflation, according to Oxford Economics. This is despite the fact that they constitute a relatively minor portion of the total price that consumers eventually pay for manufactured items.
According to Maersk CEO Vincent Clerc, the disruption in the Suez Canal might continue for at least another month. This warning was issued this week. Richard Quest of CNN was present in Davos when he made the following statement: “The longer this is going to last, the more this is going to cost.”
It is possible that there could be a scarcity of containers, which will make the shipping delays and the increase in costs much more severe. The CEO of DHL, Tobias Meyer, stated this week in Davos that longer voyages in Africa may, for example, lead to a scarcity of containers in Asia in a few of weeks’ time “because that backflow is currently not happening at the pace people were planning for.” Meyer made this statement in reference to the logistics company’s operations in Asia.