US Strikes in Yemen Could Spark a New Inflation Spike

The escalation of clashes in the Red Sea may hurt supply chains which could increase the costs of shipping that, in turn, may lead to higher prices, some analysts say.

Over the weekend, the U.S. and its allies struck targets aimed against Yemen’s Houthi rebels who have been targetting shipping vessels in the Red Sea in what they say is in response to Israel’s military campaign in Gaza.

The Houthi attacks have disrupted maritime traffic in the Red Sea and forced some ships to take longer routes across southern Africa to deliver goods from Asia to Western countries. This comes at a time when the Panama Canal, another passage used to ferry cargo from Asian countries, is experiencing a drought that is limiting the ability of ships to travel through it.

A significant chunk of global trade relies on these paths for the movement of goods into Europe and the east coast of the U.S. An estimated 15 percent of trade and between 25 and 30 percent of the world’s container shipments pass through the Suez Canal.

As clashes in the area escalate, it could lead to an increase in the costs of key consumer goods, such as apparel, furniture and household appliances.

“Higher shipping costs will crimp margins and increase input costs which could seep into consumer prices,” Jeffrey Roach, chief economist for LPL Financial, told Newsweek.

Roach suggested, however, that companies have looked for alternatives to limit the impact of the fighting in the Red Sea and its effects on shipping and delivery of goods.

“Lingering conflicts in the Red Sea will impact supply chains in the near term but we are seeing firms pivot to other forms of transportation,” he said.

Experts have said that the biggest impacted region by the delays is Europe, though limited access through the Panama Canal may put pressure on the U.S. as well.

The effect on supply chains is also different from the severe bottlenecks that global trade witnessed during the pandemic, according to EY-Parthenon senior economist Lydia Boussour.

While the risk for prices could add about 0.7 percent to global inflation, according to the International Monetary Fund’s outlook, that will also depend on how long the disruptions continue.

Meanwhile, some of the actions that were taken to fix supply chain issues that emerged during COVID may limit the effects of the Red Sea disruptions currently taking place.

“The current balance of supply and demand in the goods market is less strained than in the aftermath of the pandemic; ports are not congested; and there is more freight capacity available than during the pandemic, which could help limit the upward pressure on container rates,” Boussour said in a recent note.