Economist cautions about the inflation threat arising from Red Sea disruption

According to leading economist Mohamed El-Erian, inflation is at risk of rising again due to recent attacks on ships using the Red Sea trade route. While the disruption to shipments is not as severe as during the Covid-19 pandemic, El-Erian warned that it could still push up prices and impact economic growth. Several shipping firms have halted vessels using this route following attacks by Houthi rebels in Yemen. Last week, the US and UK conducted military strikes against the rebels. El-Erian stated that this disruption will lead to higher inflation, higher mortgage rates, and lower growth compared to what would have happened otherwise. However, he also emphasized that the impact will not be as significant as in previous years. Approximately 12-15% of global trade goes through the Red Sea via the Bab al-Mandab Strait and the Suez Canal. Houthi rebels started attacking commercial shipping late last year after the Israel-Hamas war began. As a result, major shipping companies are now rerouting their vessels around Africa's Cape of Good Hope, which adds significant time to cargo travel. Inflation in the UK has decreased from a peak of 11.1% in October 2022 to 3.9% in November. However, the conflict between Russia and Ukraine has fueled inflation, particularly affecting oil and food prices. The Red Sea is a crucial route for liquefied natural gas (LNG) shipments, with QatarEnergy suspending its ships from passing through the Bab el-Mandeb Strait. The latest inflation figures for December will be released shortly. The Bank of England and other central banks have been raising interest rates to combat inflation, but it remains uncertain whether the Bank of England will reduce borrowing costs this year. El-Erian warned that mortgage costs could increase if inflation continues to rise and interest rates are not reduced. Furthermore, there may be more disruption to the global supply of goods when factories in China close for Chinese New Year. Hapag-Lloyd, one of the affected shipping companies, stated that rerouting ships around the Cape of Good Hope is costing them millions of dollars in extra fuel. While the recent military strikes by the US and UK may help restore shipping to normal levels, the efficacy of these actions remains to be seen in the long term.