After enduring years of rising prices, consumers finally began to see some relief at the register as inflation cooled down toward the end of 2023. The recent global increase in prices was due in no small part to supply chain problems that stemmed from the pandemic, causing shipping costs to spike as transport times slowed to a crawl. It also didn’t help when an enormous container ship got stuck in the Suez Canal in 2021, which blocked trade on the Red Sea while tugboats attempted to unclog the traffic jam.
Three years later, shipping companies are once again experiencing a major crisis in the Red Sea that could send inflation soaring. For weeks, militant groups based in Yemen have been attacking container ships in what experts say is a response to the current war in the Middle East. As a result, six of the ten major shipping firms are rerouting their fleets to avoid the Red Sea, the vital shipping lane that connects with the Suez Canal. This waterway is a crucial transportation hub, accounting for 10 to 15 percent of world trade and 30 percent of container shipping volumes.
As the Red Sea becomes increasingly dangerous, big companies like Maersk, MSC, and Hapag-Lloyd are now sending ships around the Cape of Good Hope in South Africa. This can result in delays of up to three weeks, which has already led to increased shipping costs. “The longer the disruptions persist, the stronger the stagflationary effects for the global economy,” said economist Mohamed A. El Erian. Matters could get even worse if militants begin attacking oil and energy ships, causing prices for other goods to spike. “In a setting of escalating conflicts, energy supplies could also be substantially disrupted, leading to a spike in energy prices,” said the World Bank in a report. “This would have significant spillovers to other commodity prices.”
Questions:
- Why are shipping companies rerouting their fleets to avoid the Red Sea?
- Why would disruptions in oil and energy transportation cause the prices of other goods to spike?
Source: Hanna Ziady, “How the Red Sea Crisis Could Clobber the Global Economy,” CNN, January 10, 2024.