Stagflation In 2024? Red Sea Crisis Could Trigger Domino Effect For Global Costs

Could stagflation be the story of 2024 as tensions in the Middle East and the Red Sea escalate? After a U.S.-led coalition conducted airstrikes against Houthi rebels in Yemen this week, the stakes are raised — as are the risks of inflation remaining stubbornly high.

Stagflation is the emergence of rising inflation during an economic downturn — it’s not common, as weak demand during a downturn usually draws prices lower.

But it is a dreaded phenomenon for policymakers, as it leaves them hamstrung to act. If they raise interest rates, they risk further damage to an already weak economy and if they cut to help bolster the economy, the risk is further inflation.

What Are The Current Risks?

The economy is expected to slow in 2024. Purchasing manager surveys are already showing signs of slowing activity in manufacturing industries as inflation and higher interest rates cooled demand for consumer goods.

While inflation has eased in recent months — the December consumer price index report this week showed inflation rose again in the final month of 2023.

Analysts at Schroders are now considering whether the events unfolding in the Middle East could be inflationary as goods, no longer moving through the Red Sea and Suez Canal, are diverted around Africa — a much longer route that is adding to shipping costs.

In recent days this has pushed oil prices back up towards $80 a barrel and the main risk is that further escalation, now that U.S. forces have struck against the Houthis in Yemen, could push commodity prices even higher.

“In addition to trade frictions, a widening of tensions in the region could push oil prices up towards $120 per barrel,” said David Rees, senior economist at Schroders.

In midday trading on Friday, oil prices had eased from their highs, but remained around 3% higher on the day, with Brent crude at $80 a barrel. The United States Oil Fund (NYSE:USO) an exchange traded fund that tracks light-sweet crude, was up 2.5%.

Also Read: Inflation Rises More Than Expected To 3.4% In December, Rattling Traders Betting On Fed Rate Cuts

Supply Chains

The chief risk for higher inflation would be if supply chains became blocked, as they did during the global Covid pandemic — which was the chief driver of the inflation currently being tackled by central banks.

The key difference…