Attacks on freight ships in the Red Sea could increase inflation. Here's how.

Price hikes could accelerate for electronics, furniture and other goods.

December 22, 2023, 3:23 PM

Inflation is falling toward normal levels, according to fresh data released Friday from the Federal Reserve's preferred measure, the Personal Consumption Expenditures price index.

The information is the latest in a string of good news for price increases, but a major disruption of global trade could threaten that progress, some experts said.

Attacks on ships along a key route through the Suez Canal have forced freight companies to divert deliveries, sharply escalating shipping costs and risking higher prices for everything from oil to electronics to furniture, they said.

"If this continues, we're going to see increased shipping costs stacked onto the price of goods," Rob Handfield, professor of operations and supply chain management at North Carolina State University, told ABC News.

"Just when we see inflation under control, hopefully this won't be another force to increase it again," Handfield added.

Other experts, by contrast, downplayed the implications for prices, saying the shipping industry could weather the fallout with little effect on U.S. consumers.

Since October, Yemen-based Houthi militias have launched over 100 attacks targeting at least 10 merchant vessels, according to a statement from the Pentagon.

Indicating the significance of the disruption, the U.S. launched an international task force this week aimed at safeguarding the area from such attacks.

The Houthis have targeted commercial ships traveling through the Red Sea as they approach the Suez Canal, which the U.S. Naval Institute says facilitates roughly 12% of global shipping traffic.

Major shipping companies MSC, Maersk and Hapag-Lloyd, as well as British oil giant BP, have responded to the attacks by diverting their ships to alternative routes.

Freight re-routed from the Suez Canal typically travels around the southern tip of Africa, extending the length of the trip by roughly 30%, Jason Miller, a professor of supply-chain management at Michigan State University, told ABC News

The increased travel time has strained the supply of ships, since longer routes mean fewer ships are available to carry goods at any given time, Miller said. That bottleneck, he added, has driven up short-term rates known as spot prices, which companies negotiate for the transport of their goods.

"We're starting to see those spot prices increase very rapidly," Miller said.

Prices have reached as high as $10,000 for a 40-foot container ship, up from roughly $2,400 last week, CNBC reported on Thursday.

PHOTO: People enjoy the water as a container ship crosses the Gulf of Suez towards the Red Sea before entering the Suez Canal, in El Ain El Sokhna in Suez, east of Cairo, Egypt, September 5, 2015.
People enjoy the water as a container ship crosses the Gulf of Suez towards the Red Sea before entering the Suez Canal, in El Ain El Sokhna in Suez, east of Cairo, Egypt, September 5, 2015.
Amr Dalsh/Reuters, FILE

The disruption holds significant implications for oil prices, since the Suez Canal is an important shipping route for crude oil coming from the Middle East, experts said.

Oil prices play a direct role in the price of gasoline and factor indirectly into costs associated with the delivery of goods.

The price of Brent Crude oil, a key industry metric, has risen about 3% this week.

The crisis in the Red Sea could also increase prices for a range of consumer products imported from countries in Southeast Asia, such as India and Vietnam, since those goods travel through the Suez Canal, some experts said.

Top products imported to the U.S. from India so far this year include solar panels, bed linens, wooden furniture, shrimp, and honey, according to U.S. census data reviewed by ABC News.

"This could trigger a domino effect that will push prices up eventually," Christopher Tang, a professor at the UCLA Anderson School of Management, who focuses on supply chains, told ABC News.

Still, some experts cautioned that the trade disruption could ultimately have little or no effect on U.S. prices.

The high-traffic holiday season is nearly over, Miller said, meaning those products have already been shipped. Plus, he added, imported goods make up only 11% of U.S. consumer spending, citing data from the San Francisco Federal Reserve.

"This could have a very minor impact," Miller said.

Even so, the experts acknowledged that the outcome of the conflict in the Red Sea remains unclear. A wider regional war could intensify the potential effect on prices, while a speedy resolution of the Houthi attacks could ease the inflation risk, they said.

"It's too early to make a prediction of how this plays out," Miller said. "There's just so much uncertainty."