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Red Sea Conflict Could Push Inflation Up Again, Warns Economist
Strikes by Houthi rebels is prompting shipping companies to change their routes, adding thousands of miles to their journeys.
The worsening conflict in the Middle East risks reigniting inflation in the UK and Europe, as a key shipping route is disrupted, warns economist Mohamed El-Erian.
Last week, the US and UK launched military strikes against Houthi rebels, in response to attacks on shipping vessels. The disturbance has the potential to reduce economic growth and push up inflation, as shipping companies seek lengthy workarounds.
Critical Trade Route
Roughly 12% of global trade relies on the Red Sea's Bab al-Mandab Strait, which lies between Eritrea and Djibouti on the western side and Yemen on the east, and on the Suez Canal. Taking the alternative route around the Cape of Good Hope can add between 12 and 18 days to shipping times. Iran-backed Houthi rebels started attacking commercial shipping at the end of 2023, taking advantage of the opportunity provided by the Israel-Hamas war. This necessarily causes problems for supply chains, and increases costs for importers.
Almost 15% of goods imported into Europe, the Middle East, and North Africa are transported from Asia and the Gulf by sea. Significantly, this includes 22% of refined oil and 13% of crude oil. The increase in energy costs that this brings could affect every sector.
The Red Sea is also an important transit route for liquefied natural gas (LNG). QatarEnergy has already paused transport of its ships through the Bab el-Mandeb Strait.
While there is cause for concern, El-Erian believes that the impact is unlikely to be as significant as the disruption caused by COVID in 2020-2021, and likely not as severe as the inflationary effect of Russia's invasion of Ukraine. The UK and US are likely to conduct more strikes against the Houthis in the coming days, but it is as yet unclear how much this might improve the situation.
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