Why Red Sea Disruptions Won’t Fuel US Inflation Spike

• Goldman Sachs doesn’t expect an inflation spike in the US fueled by turmoil in the Red Sea. 
• To be sure, Red Sea disruptions have caused freight costs to soar as much as 350%. 
• Yet, the situation is very different from the pandemic when shipping and inflation both jumped.

Shipping disruptions in the Red Sea have caused freight costs to spike, but the impact on inflation will remain muted, according to Goldman Sachs. 

While inflation in the US has cooled from four-decade highs, concerns have mounted over prices ticking higher as a result of attacks by Iran-linked militants that have pushed up international shipping costs. The tumult follows Hamas’ attacks on Israel in October and the ensuing conflict in Gaza.

Some analysts have cautioned that price pressures may return again, given that large multinational firms have started to reroute their vessels away from the Suez Canal and opt for longer travel routes to avoid attacks. 

In a note published Monday, strategists led by Jan Hatzius highlighted how freight rates for vessels moving from Asia to Europe have climbed by 350%, and those moving from Asia to the US have jumped 100%.

However, they maintained that goods inflation still won’t see a meaningful uptick for two reasons. 

First, the shipping cost spike isn’t happening alongside either factory shutdowns or a surge in demand, which is what happened at the tail-end of the pandemic when goods inflation soared.

In Goldman’s view, that suggests “less scope for amplification of cost pressures today.”

“[I]n contrast to the shipping cost surge in 2021 and 2022, the current increase is occurring against a more benign macro backdrop,” the strategists said. “Global production capacity — which was significantly curtailed as governments in China and Southeast Asia shut down factories in response to public health concerns — is less likely to be significantly affected by shipping delays, and goods demand is no longer receiving a boost from fiscal transfers as it did in the aftermath of the pandemic.”

Second, Hatzius and his team pointed out that international transport costs only account for a small share of final consumption goods, at roughly 1.5% on average.

Meanwhile, sea freight accounts for about 0.7%. 

“Under reasonable pass-through assumptions, a 100% increase in the cost of sea freight therefore only raises core goods inflation by around 0.4pp and overall core inflation by around 0.1pp,” the Goldman strategists said.

In an extreme upside scenario in which costs are fully passed on to consumers, they said it’s possible that year-over-year inflation could climb 0.2pp.

Ultimately, the firm’s base-case forecast is for the Red Sea-induced climb in shipping costs to push global core inflation about 0.1pp higher in 2024, with a larger impact on Europe than the US.