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February 12, 2024

Chart of the Week: Will high shipping costs bring a second wave of inflation?

by Fathom Consulting.

Attacks on commercial ships in the Rea Sea have forced vessels to take the longer and more expensive route around the Cape of Good Hope to get from the Indian Ocean to the Mediterranean. Coupled with a reduction in Panama Canal crossings due to lower-than-usual water levels, this has prompted a sharp rise in global shipping costs — drawing parallels with the supply shocks of 2021 and 2022, when inflation soared.

While it remains to be seen how these situations evolve, there are several reasons to believe that the price shock of 2021-2022 is not repeating itself. First, shipping costs are still only a third of what they were in September 2021. Second, energy prices are falling, not rising like they were before. Finally, and most importantly, it was a broader mismatch between demand and supply as economies reopened after lockdowns that was responsible for pushing up the prices in 2021 – there is no such mismatch today. Current disruptions to shipping will increase prices at the margin but are not enough alone to lead to a ‘second wave’ of inflation. However, an escalation in Middle East tensions that had a significant negative impact on the supply of oil might be a different story.

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The views expressed in this article are the views of the author, not necessarily those of LSEG.

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