Red Sea shipping crisis stokes further inflation fears

A missile attack on a Belize-flagged ship has dashed hopes for an end to the shipping logjam between Asia and Europe just as freight rates were stabilising, with retail consumers expected to bear higher costs.

The disruption to global trade is starting to percolate to retailers as spare part inventories sourced by Western manufacturers from Asia have started thinning. This has led to inflation worries resurfacing and clouded hopes that central banks would cut interest rates soon.

Ninety per cent of ships are avoiding the Red Sea due attacks from Yemen on vessels in the waters. This is causing ships to take two weeks longer than usual to reach their destinations, which in turn is causing a shortage of critical parts for manufacturers, said Blair Robbins, partner at Eisner Advisory Group LLC, a New York-based consultancy and accounting firm.

Those disruptions have caused carmakers Tesla and Volvo to suspend some production in Europe due to a shortage of components. Without a resolution to the crisis in sight, it is now likely to affect manufacturers in other sectors as well, executives say.

If manufacturers are unable to get the key components they need, then “they are going to cancel orders for all the other components that they don’t need because they’re not making the product,” he said.

Manufacturers are facing a double whammy as it is becoming too expensive to depend on inventories to tide over the supply crisis due to high interest rates, Robbins said. Since March 2022, the US interest rate has risen by one of its steepest levels in years.

“One way or another, the cost of your goods are being affected …. The longer [the shipping disruption] goes on, the more you’ll start to see companies pass on the price to consumers,” Robbins said.

The impact is likely to be more acutely felt when retailers start restocking shop shelves for spring in about a month, he added.

Naïk Londono, co-CEO & co-founder of smart container tech company AELER, said cargo owners are increasingly considering airfreight as an alternative to avoid shipping delays. Typically airfreight is used for expensive items like semiconductor chips or precious metals.

Some analysts say their expectations about lower interest rates are unchanged.

“It is possible that the current level of disruption is affecting shipping costs and therefore putting some pressure on inflation. But the magnitude at this point seems quite small and not significant enough to change interest rate policies,” said Antonio Fatas, a professor of economics at INSEAD business school.

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Red Sea shipping crisis stokes further inflation fears

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