Economists warn that cruise inflation will complicate rate cuts

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Investors are underestimating the risk that rising shipping costs will push up inflation and economists have warned that the pace of interest rate cuts by the European Central Bank and the Bank of England will slow.

Cost of moving a 40ft container between Asia and Northern Europe at short notice Doubled From $3,223 to $8,461 since April, according to shipping data specialists Xeneta, following an intensification of Houthi rebel attacks on ships traveling through the Red Sea to the Suez Canal.

When commodity prices began to rise in December, policymakers were confident that they would not push up consumer goods prices like the biggest spike since the pandemic.

But Christine Lagarde, president of the European Central Bank, this week flagged heightened geopolitical tensions as a downside risk to inflation.

Some economists are now sounding the alarm.

Given tensions in the Red Sea, possible attacks on US and German ports, low water levels in the Panama Canal and a rush to build cargo earlier than usual, researchers at investment bank Nomura see little chance of a drop in shipping costs. Vacation.

Andrzej Szczepaniak, an economist at Nomura, argued that as the consumer-led recovery in the euro zone and the UK gathers strength, companies are more likely to pass on these costs.

„Real wages are improving, inflation is slowing, strong consumption going forward and an acceleration in growth,” he said, adding that shipping costs could add 0.3 to 0.4 percentage points to UK and eurozone inflation by the end of 2025. , even if they plateau at current levels and then gradually decline.

Brian Coulton, chief economist at Fitch Ratings, expects a similar outcome and thinks investors aren’t paying enough attention to the risk that central banks will have to delay rate cuts to cover the difficult „last mile” of hitting inflation targets.

„In the past year, [the narrative] „It’s about the stickiness of services inflation,” he said. „Market participants have taken a lot of comfort from the stabilization in core commodity prices. . . I think this is an important fly in the story.

Some economists don’t share this view — or at least, not yet.

Economist Holger Schmiding of Berenberg said shipping costs were „more of a normal annoyance than a concern” and would only raise inflation by 0.1-0.2 percentage points as manufacturers were unable to pass the costs.

Simon McAdam at consultancy Capital Economics said the inflationary effect on shipping costs was „small beer” compared to the much bigger challenge posed by sticky services prices.

Macadam said the increase in freight rates on routes out of China is „not representative” of overall global shipping costs, and shipping costs represent only a small portion of the value of goods. Even if producers set higher prices under the „perfect conditions” of 2021 and 2022, they would pass on only half the increase to consumers, pushing inflation up by a maximum of 0.2 percentage points.

Meanwhile, Claus Vistesen at Pantheon Macroeconomics, a consultancy, has no doubt that if sustained, higher shipping costs will „show up in consumer prices at some point” – but only after surveys and warning signals in factory-gate prices. „They shall not come as a thief in the night.”

But Simon French, chief economist at investment bank Panmure Liberum, said even a relatively small increase in commodity prices could be a concern for central banks and a potential obstacle to deflation.

„Central banks have set an easing path . . . which presupposes benign commodity inflation,” he said. „Tariffs at current levels could derail it . . . The market hasn’t absorbed it yet.