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Why Red Sea attacks will bring inflation back

A Yemeni coastguard patrols the Red Sea close to the Bab al-Mandab Strait. Credit: Getty

January 8, 2024 - 7:00am

With the Red Sea largely blockaded by the Houthis and tensions rising in the Middle East, data is now starting to show the effects on global shipping. Between 12% and 15% of global trade moves through the Red Sea, but the volume of trade has fallen from around 5.5 million metric tons per week in late-November to around 2.6 million metric tons per week at the start of January. This is a decline in trade not seen since the obstruction of the Suez Canal by the Ever Given ship in 2021.

As the Houthis’ main targets, container ships have unsurprisingly been hit the worst. But oil tankers have also been impacted, falling from around 27 million to 18.3 million metric tons per week since November. The oil price has still not responded to these developments, suggesting that the market may now be under the control of speculators.

The costs are starting to rack up, most obvious among them increased shipping time, as travelling around the Cape of Good Hope in South Africa adds an additional 40% onto the journey, or 10 days. On top of this, when ships get to South Africa they have to refuel in Durban, but the facilities are not used to such large volumes and so refuelling or “bunker” costs are skyrocketing. 

It is no longer a question of whether these developments will increase inflation, but instead to what extent they will. The impact will likely be similar to the lockdown-related supply chain disruptions of 2021, which gave rise to an initial uptick in inflation in Western countries. This will have major implications both economically and politically.

The last bout of inflation prompted European economies to fall into stagnation, with the full effects on housing markets and the finance system only likely to fully emerge when a recession hits. The cost-of-living crisis has been crushing, with four in 10 people still struggling to pay their energy bills even though prices have fallen from their peak. Another burst of inflation could finish our economies off.

The most immediate effect will be on interest rates. If inflation starts to rise again central banks will be eager to stamp it out quickly, their credibility challenged by not responding properly to the last outbreak. A rise in interest rates will put enormous pressure on housing markets and the banking system; there is every chance that both might finally crack and precipitate a full-blown financial crisis.

Then there are the political implications. Last month, the Federal Reserve made a surprise announcement that it was moving to lower interest rates in 2024. Given that this decision came about shortly after polling began to show that Joe Biden was expected to lose the 2024 election and that the key reason was economic mismanagement, many suspected the decision was at least partly political. It seems unlikely that the Fed will be able to hand the incumbent President this pre-election gift if inflation starts to tick upwards.

In the UK, meanwhile, the Tories are in even more trouble. Having reneged on their campaign promises to reduce the amount of migration into Britain, they have been eager to highlight that inflation is coming down in line with their campaign pledges. If inflation starts to rise again, the Government will be humiliated, and the Party may well be decimated in the next election. 

Pax Americana is over. The United States can no longer guarantee the safe passage of commercial ships through key global choke points. Some are still in denial about this new reality, waiting for the Americans to “take care” of the Houthis — as if they can best 10 years of Saudi airstrikes using American-made aircraft. The reality is that the cavalry is not coming, and if it does it will probably only make the situation worse.


Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

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Jim Veenbaas
Jim Veenbaas
6 months ago

So the solution then is to roll over and let the Houthi’s dictate economic activity across the globe?

Aidan Twomey
Aidan Twomey
6 months ago
Reply to  Jim Veenbaas

Who says that there is a solution?

Simon Boudewijn
Simon Boudewijn
6 months ago
Reply to  Jim Veenbaas

Well, do you think the solution is starting WWIII? Because than might not even do it, although it is the one lots seem to call for, like Nicki Haley – ‘Bomb Iran’

Jim Veenbaas
Jim Veenbaas
6 months ago

Maybe we should bomb the Houthis.

Martin M
Martin M
6 months ago
Reply to  Jim Veenbaas

….or even the Iranians.

Jim Veenbaas
Jim Veenbaas
6 months ago
Reply to  Martin M

Only if they respond to the Houthi bombing

Walter Schwager
Walter Schwager
6 months ago
Reply to  Martin M

So they can close the Starts of Hormuz? That won’t help much, will it?

Walter Schwager
Walter Schwager
6 months ago
Reply to  Jim Veenbaas

The Saudis tried that.

Emmanuel MARTIN
Emmanuel MARTIN
6 months ago
Reply to  Jim Veenbaas

European living standards matter more than ISraeli colonial wars. I am waiting for the hasbara downvotes.

Jim Veenbaas
Jim Veenbaas
6 months ago

This assumes it will stop once Israel withdraws from Gaza. I very much doubt it will.

Emmanuel MARTIN
Emmanuel MARTIN
6 months ago
Reply to  Jim Veenbaas

I agree this is a fragility in my isolationist position.
But Europeans should be more like Israeli patriots, and make it very clear that jihadis jihading against our interests will be retaliated by enthusiastically culling hog breeders.

Walter Schwager
Walter Schwager
6 months ago
Reply to  Jim Veenbaas

Why not try?

Jim Veenbaas
Jim Veenbaas
6 months ago

It’s going to happen. Israel might have maybe another month before the U.S. lays down the law and orders it out of Gaza.

Sayantani Gupta
Sayantani Gupta
6 months ago

Pax Americana was never serious about its imperial obligations. Instead it was and continues to be fuelled by a wholly economistic approach to build it’s military industry complex.
What prevents the most powerful navy in the world from taking on a band of rag- tag rebels?

Charles Stanhope
Charles Stanhope
6 months ago

‘They’ are still haunted by the capture of USS Philadelphia by the Barbary ‘Pirate’ state of Tripoli in 1803.
Captain William Bainbridge by sheer incompetence managed to inflict one of the greatest humiliations ever suffered by the nascent United States Navy*.

(Even worse would happen in 1813-14)

Sayantani Gupta
Sayantani Gupta
6 months ago

Even the EIC in its ” Nabob” days had nobler intentions than the present imperial pretenders

Charles Stanhope
Charles Stanhope
6 months ago

Could you imagine an American Wall St banker saying “Mr chairman I am amazed at my own moderation “!

Sayantani Gupta
Sayantani Gupta
6 months ago

No. But I can imagine that when the neo- imperials are ” trivial” they are usually ” vulgar”..

Charles Stanhope
Charles Stanhope
6 months ago

One of my favourites:-
“Our enemies are innovative and resourceful, and so are we. They never stop thinking about new ways to harm our country and our people, and neither do we.”

(*George Bush Jnr Washington, D.C., August 5, 2004.)

Walter Schwager
Walter Schwager
6 months ago

The US Navy is obsolete against air and waterborne drones. A frigate has 90 missiles costing between 1 and 4 million dollars. The Houthis have an unlimited supply of drones at $10,000 each

Peter B
Peter B
6 months ago

So, one month ago this same author published a piece claiming that short sellers were artificially driving down the price of oil. There was no real evidence then and no more now. Speculators cannot drive market prices for long.
I followed his link here – “data is now starting to show the effects on global shipping.” – which led me via a tweet to a page containing no obviously relevant information.
It’s baffling how a supposedly intelligent man can repeatedly mix up “could happen” and “will/must happen” in the same article. Yes, all his conjectures might happen, but there’s little evidence they have or that there’s any inevitability about this. Nor any consideration of other factors which might compensate or outweigh the forces he cites.
I get the sense with Mr. Pilkington that he has a set of fixed beliefs and then attempts to interpret data and events to support those views rather than the other way round (i.e. the scientific approach).
I’m fairly sure the US and its allies are quite capable of securing the Red Sea if they really put their mind to it.

Andrew McDonald
Andrew McDonald
6 months ago
Reply to  Peter B

I got the same impression – the article bustles along towards its doomdoomdoom conclusion without stopping to consider the alternative outcomes. The Beeb is also rushing to tell us how the smallest pressure on any supply chain will instantly lead to savage inflation in UK supermarkets – almost as if they want it to happen, eh?

Sayantani Gupta
Sayantani Gupta
6 months ago
Reply to  Peter B

The data link is quite useful. It points out what the UH columnist doesn’t state with clarity- the US actually doesn’t want a direct involvement with the Houthis considering the context of the Iran bomb blasts.

j watson
j watson
6 months ago

Already been Unherd articles on this haven’t there? Not much new here.
The reality is the repercussions don’t benefit a number of Middle east players much either – Saudi and Gulf States, Egypt. Even China won’t want a bottleneck that stimulates other supply chains. So won’t just be the West needing this sorted.
Longer term less reliance on that trade route probably not unhelpful.
And to add – shows the nonsense of the ‘Global Britain’ moniker – in the same wk we’ve decommissioned two Frigates because we can’t crew them.

Peter Principle
Peter Principle
6 months ago

The article says that the military action with the fate-tempting name ‘Operation Decisive Storm’, did not achieve anything after 10 years of Saudi airstrikes. (Well, actually, it did cause a humanitarian catastrophe because of the cholera epidemic that resulted from the Saudis bombing the Houthi water treatment plants.)
All us armchair generals know that you don’t win a war by airstrikes alone. However, let’s not be fatalistic. Airstrikes can be effective for specific tactical goals, especially when those on the receiving end do not feel existentially threatened. Attacks on the Red Sea shipping lanes at the behest of Tehran are an optional extra for the Houthis.
ï»żSo, chocks away!

Walter Schwager
Walter Schwager
6 months ago

Traffic at the Israeli Red Sea Port of Eilat is down 85 percent