Ongoing tensions in the Red Sea, which are continuing to cause “significant disruption” to shipping routes with Yemen’s Houthi rebels launching regular rocket attacks, have the potential to push up inflation in Britain, financial experts have warned.
Tom Pugh, economist at audit and tax specialists RSM UK, was speaking on the latest UK Manufacturing Purchasing Managers’ Index published by the Chartered Institute of Procurement & Supply.
The survey is compiled using responses to questionnaires sent to purchasing managers in a panel of about 650 manufacturers towards the end of each month. It suggests the manufacturing PMI in January continued to show signs of “stagnation” rising to just 47, up from 46.2 in December. Any figure below 50 indicates a lack of growth within the sector.
Mr Pugh said: “The deteriorating situation in the Red Sea poses clear risks to the UK economy, especially the manufacturing sector, in the form of both supply disruption and higher inflation.
“However, unless there is a wider escalation and a bigger impact on commodity prices, the impact would be manageable, and it is unlikely to influence the Monetary Policy Committees decision later today.”
“The attacks on international shipping in and around the Red Sea have caused significant disruption to shipping routes from Asia and the Middle East to Europe.”
Currently eight of the 10 largest container liners, controlling 61 percent of global shipping capacity, were now avoiding passage Bab al-Mandab Strait, the maritime chokepoint linking the Indian Ocean with the Red Sea through which about a third of global container traffic passes, Mr Pugh pointed out.
He added: “Instead, ships have to travel around Africa, which adds about 10 to 14 days to journey times and significantly increases costs.”
As such, spot rates for containers travelling from Asia to Europe have more than doubled in the last month, although they remain well below the rates reached during the pandemic-induced supply chain crisis.
There would therefore “undoubtedly” be consequent delays with UK manufacturers and retailers who may be looking at delays of as long of two weeks, he warned.
Mr Thornton concluded: “The biggest impact on prices will be for those low-value bulky goods where shipping makes up a significant portion of the total cost. But this isn’t set to be a repeat of the pandemic-induced supply chain crunch.
“Ports are not congested and there are more ships available for transport than in 2021. The best estimate is that higher shipping costs could add between 0.7 percent to 0.2 percent to inflation in the UK and Europe, but this could grow the longer the situation continues.
“However, unless there is an escalation into energy markets, the impacts from the crisis are probably not large enough to warrant the Bank of England taking any action.”
The Bank of England today (February 1) held its main interest rate at a 15-year high of 5.25 percent in its battle against inflation which it believes is still too high for comfort.
Like the US Federal Reserve on Wednesday, the UK’s central bank is not expected to steer financial markets into thinking that a rate cut is likely in the coming months, with cautious policymakers awaiting more evidence that inflation is rapidly heading down toward their target of two.
In December, inflation in Britain unexpectedly rose to four percent, an increase that tempered market expectations that the central bank would cut borrowing costs as soon as May.
The Bank of England carries a target inflation rate of two percent and experts have said that the leap in December could have spooked its Monetary Policy Committee.