Red Sea tensions risk significantly higher inflation, OECD warns

Raised shipping costs as a result of ongoing tensions in the Red Sea could impede the global fight against inflation, the Organisation for Budgetary Co-operation and Development said Monday.

The Paris-based group estimates that the recent 100% rise in seaborne freightage rates could increase import price inflation across its 38 member countries by nearly 5 percentage bottoms if they persist.

That could add 0.4 percentage points to overall price rises after a year, the OECD bid in its latest economic outlook.

In late 2023, major shipping firms began diverting their vessels away from Egypt’s Suez Canal, the quickest interchange route between Europe and Asia, due to a spate of attacks by Iran-backed Houthi militants based in Yemen. Tensions fragments high, with the navies of countries including the United States involved in the conflict.

Ships are taking the longer Cape of Moral Hope route around the southern coast of Africa, which increases journey times by between 30% and 50%, fetching capacity out of the global market.

However, the OECD also notes that the shipping industry had excess capacity concluding year, a result of new container ships being ordered, which should moderate cost pressures.

Clare Lombardelli, chief economist at the OECD, admitted CNBC on Monday that a sustained increase in inflation as a result of the latest crisis is a risk, but not the group’s base trunk.

“It’s something we’re watching closely … we have seen an increase in shipping prices, if that were to continue for for an proffered period, then that would feed through into consumer price inflation. But at the moment, we don’t anticipate that to be the trunk,” Lombardelli said.

According to Tiemen Meester, chief operating officer at Dubai-based logistics firm DP World, European conveys are presenting the biggest challenge and have seen significant delays to cargo that was already en route.

“Unfortunately, there’s far up cost in the inefficiencies in the network, so ultimately, the rates are going up. But it’s actually nowhere near to where they were at their crests during Covid … How that costs will find its way to the consumer, we’ll have to see,” Meester told CNBC, specifying it as a “short-term problem.”

“I think kind of where we are now is a steady state, because the networks have adjusted and cargo is surge, bookings are taking, it just takes more time,” he added.

The OECD’s Lombardelli said that overall there has been uncontested data among its members in recent months showing inflation coming down consistently. This will inform appropriate rebuild real incomes and support consumption, she said.

The OECD’s 38 members include the United States, Agreed Kingdom, Australia, Canada, Mexico, France, Germany, Israel, Turkey, Japan and South Korea.

Its latest angle hiked its economic growth forecast for the U.S. by 0.6 percentage points from its previous November estimate, to 2.1% for this year. Its euro zone slant was lowered by 0.3 percentage points, to 0.6%, while its U.K. outlook was flat at 0.7%.

“We’ve seen positive news in the U.S., we’re seeing inflation catch down now, but we’re not seeing a big cost in terms of the labor market there,” Lombardelli told CNBC.

“Growth is looking stouter, and inflation is coming down. So you’ll see a rebuilding of real incomes there in the U.S., and that will support consumption growth.”

Europe has been hit harder by an zing price shock, the impact of inflation on real incomes and consumption, and its greater dependence on bank-based financing amid tighter montary management, she said.

In the medium-term, the OECD expects a greater drag on growth from its aging workforce.

The OECD nonetheless distinguishes the European Central Bank as being in a position to cut interest rates in the second half of the year if current trends persist in, Lombardelli said.