Red Sea Crisis: OECD Warns of Higher Inflation Amid Ongoing Tensions in Contested Waters

The Organization for Economic Co-operation and Development (OECD) on Monday said that higher inflation is highly likely to occur as the tensions in the Red Sea continue to rise.

The situation would also result in elevated shipping costs, which would in turn impede the global fight against inflation. The Paris-based group put out an estimate that the recent 100% rise in seaborne freight rates could increase import rice inflation across its 38 member countries by nearly five percentage points.

Red Sea Crisis

(Photo : AFP) (-/AFP via Getty Images)
The Organization for Economic Co-operation and Development (OECD) said that higher inflation is more likely due to rising tensions in the Red Sea.

The OECD said in its latest economic outlook that this would mean that there would be an additional 0.4 percentage points to overall price rises after a year. Late last year, major shipping firms started to divert their vessels away from Egypt's Suez Canal. It is the quickest trade route between Europe and Asia.

The decision was made due to a series of attacks made by Iran-backed Houthi rebels that are based in Yemen. Since then, tensions have remained high, with the navies of countries, including the United States, have become involved in the regional conflict, as per CNBC.

Vessels are now taking the longer Cape of Good Hope route around the southern coast of Africa. This way increases journey times by between 30% and 50%, taking capacity out of the global market.

However, the OECD also noted that the shipping industry had excess capacity last year, which was a result of new container ships being ordered. This would work on moderating cost pressures.

The chief economist at the OECD, Clare Lombardelli, said on Monday that a sustained increase in inflation as a result of the latest crisis is a risk but noted that it was not the group's base case. He added that it is something that they are watching closely.

Global Economy

On the other hand, the OECD said that the global economy is on course to hold up better this year than expected only a few months ago. World economic growth was estimated to ease from 3.1% last year to 2.9% this year, which is better than the 2.7% expected in November in the group's last outlook, according to Reuters.

During an update of its forecasts for major economies, the group left its 2025 global estimate unchanged at 3.0%. They expect growth next year to be boosted by major central bank rate cuts as inflation pressures subside.

Experts anticipate that the U.S. economy would grow 2.1% in 2024 and 1.7% in 2025 as lower inflation boosted wage growth and triggered interest rate cuts. Also, as China contends with real estate markets wobbles and weak consumer confidence, its growth was seen to slow down from 5.2% last year to 4.7% this year and to 4.2% next year.

Fortunately, many executives whose companies ship goods through the Red Sea and Suez Canal said that the impact of the situation in the region has so far been limited. This was in part because of lessons that they learned from the more severe, worldwide supply chain disruptions that happened during the worst of the COVID-19 pandemic, said the New York Times.