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Red Sea disruption raises spectre of inflation again

Suzuki and other automakers are suspending European production amid supply chain crunches

Employees inside the Suzuki Motor plant in Esztergom, Hungary where production of some models is being suspended until January 22nd. Photographer: Akos Stiller/Bloomberg

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Cantillon
Tue Jan 16 2024 - 06:00

Shipping disruption in the Red Sea already appears to be damaging European manufacturing, raising the question as to whether the region’s producers can afford a protracted, expanded conflict in the region.

It also raises the question whether the expected path towards ECB interest rate cuts later this year may be rather more complicated than many economists expect.

Attacks by Houthi forces on vessels travelling through the Red Sea in solidarity with Gazans suffering the humanitarian crisis caused by Israel’s bombardment have forced transport companies to reroute hundreds of shipping vessels bound for Europe from Asia around the Cape of Good Hope.

Rerouting costs both time and money and shipping container rates have soared in recent weeks as shippers seek to recover additional fuel and labour time costs. It has also put pressure of air freight rates with companies scrambling for alternatives to sea transport.

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The disruption is also beginning to cause supply chain issues for some large companies.

On Monday, Suzuki said it will suspend production of some of the models made at its Hungarian motor factor until January 22nd due to delayed shipments of engines from Japan.

Tesla and Geely-owned Volvo Car announced suspensions in Europe in the second half of last week. These additional costs, as consumers will be keenly aware after the experience of the pandemic and the war in Ukraine, will eventually be passed on to them with higher prices for final goods.

It is safe to say the easing of Covid-induced supply chain crunches throughout 2023 was one of the main drivers of falling inflation across euro area. While the impact of the Red Sea disruption is not expected to be nearly as severe as all of that, it does cloud the outlook for consumer prices and, consequently, interest rates, as Mohamed Al-Erian, chief economic adviser at financial services giant Allianz, told the BBC on Monday.

Yet, economists polled by Bloomberg recently remain confident of four ECB cuts this year, beginning in the summer. While it is too early to say whether they might again be underestimating the inflation outlook, policymakers in Frankfurt have an increasingly bumpy road to travel between now and June.

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