Drought Threatens Inflation Battle: Panama Canal

Credit: Michael D. Camphin/Pexels

Severe drought in Panama threatens US inflation and global supply chains as water levels at Gatun Lake, vital for the Panama Canal, drop significantly. Rising surcharges and weight limits for vessels crossing the canal could lead to higher shipping rates and the need to find alternative routes from Asia to the US. Economists and supply-chain experts are concerned that this could revive the chaos experienced in 2021, with shortages of goods and increased shipping costs contributing to high US inflation levels, as reported by Bloomberg.

Implications in economy

The ongoing drought in Panama is posing multiple challenges and risks. It not only threatens water levels in the Panama Canal, potentially disrupting shipping and trade but also has implications for inflation and the economy. The drought may hinder the Federal Reserve’s efforts to achieve its 2% inflation target, as it creates unfavourable conditions for the economy. Inflation in the US has been gradually slowing but remains high at 4.7%, which is uncomfortable for central banks. Ignoring the negative impact of shipping disruptions, as occurred in 2021, is seen as a serious mistake. 

Drought in 2024?

The Panama Canal Authority predicts that water levels will reach a new all-time low by July, exacerbated by the upcoming El Niño system that typically brings drought and higher temperatures. This could extend the dry season in Panama in 2024 and further affect water levels. The drought is already increasing the cost of transporting goods through the canal, as draft levels have been reduced, necessitating lighter loads and resulting in higher prices for consumer and industrial goods. Additionally, some ocean carriers have started implementing container fees in response to the draft limits. Overall, the drought in Panama is posing significant challenges for the canal, inflation, and the economy.

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Source: Bloomberg


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