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Economic Viewpoint

Deep in the Red: How the Red Sea Crisis Could Affect Inflation

February 14, 2024
Francis Généreux, Principal Economist • Marc-Antoine Dumont, Economist

The ripple effects of the Israel–Hamas conflict extend far beyond tensions in the Middle East. These include attacks by Yemen’s Houthi rebels in the Bab al Mandab Strait, which are disrupting shipping in the Red Sea and the Suez Canal. Since the year began, shipping costs have climbed, bringing back one of the factors that caused inflation to spike in 2021 and 2022. Is this latest surge in freight rates putting more pressure on global supply chains and consequently fuelling inflation in the major economies? By analyzing inflationary shocks, we show that, if this situation persists or gets even worse, it could push inflation a little higher. But we don’t expect it to trigger the same persistent runaway inflation we saw in 2021 and 2022. That said, it could still push back the timeline for future interest rate cuts.

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