Fitch Ratings reports that disruptions to Middle East routes will mean the last mile of reducing inflation will not be smooth sailing.
Cargo ships passing through the Red Sea have been facing attacks by Houthi rebels since the end of 2023. The Houthi rebels are a Yemeni group that launched these attacks in response to Israel's war against Hamas in Gaza. This has led to a spike in shipping costs of more than 150% so far this year, which could raise core inflation by 05 percentage points.
These increases are likely to be reflected in imports in the coming months, while longer transit times will reduce intermediate inputs and consumer goods. The outlook for shipping costs is uncertain, but a reasonable scenario is that they will remain high for a few quarters. Fitch wrote.
As freight carriers change routes, the impact of rising costs will not be immediately reflected in inflation measures. It takes 8 to 10 months for this effect to be reflected in the Consumer ** Index (CPI), although imports** reflect these costs within two months.
This suggests that by the end of 2024, US import** inflation will rise by 35 percentage points. We then construct a model of US core goods inflation based on imports** and the New York Fed's Global Chain Pressure Index (GSCPPI) and assume a modest rise in the latter. "This suggests that U.S. core goods inflation will rise by about 1."5 percentage points, which is equivalent to the core CPI inflation in the United States will rise by about 04 percentage points. ”
Economists have long warned that the final phase of bringing inflation down to the central bank's target rate could be the most challenging.
In the US, the inflation report for January unexpectedly rose, dampening hopes of an imminent rate cut. But there are also concerns that the Fed's reluctance to ease monetary policy could end up having a negative impact on the economy, and that the disruption won't make it easier for the Fed to make decisions.
Fitch noted that while rising shipping costs have added another layer of difficulty, the situation in 2021 will not be repeated. That year, the pressures of the pandemic wreaked havoc on the ** chain, while demand for goods and manufacturing inputs surged.
Estimates cited by the International Monetary Fund (IMF) show that freight costs alone led to a 1.1 rise in inflation that year5 to 2 percentage points. However, Fitch said that this time, the growth in goods consumption was modest, while the broader ** chain was barely restricted.