When economists talk about bottlenecks, they typically refer to points in a supply chain that slow down production. The global economy is at present providing a rather literal example of the metaphor. It is as if someone has put a cork in the Suez and Panama canals, sources Economist.
Surge In Inflation?
In normal times, the canals carry about 10% and 5% of maritime global trade respectively. Now the Panama Canal Authority has capped the number of ships that may traverse its channel, owing to low water levels. Attacks by Houthi militants on ships in the strait of Bab al-Mandab, part of the passage from the Indian Ocean to the Suez Canal, have prompted some of those traveling between Europe and Asia to take the longer route around Africa instead.
Given that the rich world at last appears to be defeating inflation, this is making policymakers nervous. Rising shipping prices from mid-2020 to early 2022 coincided with the surge of inflation in the first place. Their subsequent fall coincided with its decline. Since the Houthi attacks on ships began in November, prices have once again jumped. According to the Freightos Baltic Index (FBX), the cost of shipping a standard container rose by 93% in the week of January 9th. Drewry, a consultancy, notes that for the Shanghai to Rotterdam route, which would usually pass through the Suez Canal, the cost jumped by 114% to $3,577 over a similar period.
Demand Supply Mismatch
Future surveys may well indicate more concern. Annual shipping contracts are typically agreed in March, notes Chris Rogers of S&P, meaning that current rates do not reflect the true cost of transport. If disruption lasts until contracts are renegotiated this could swiftly change, he adds.
Ultimately, though, the inflationary impact of bottlenecks reflects the degree of mismatch between supply and demand. Economists at the annual meeting of the American Economic Association, held from January 5th to 7th in San Antonio, Texas, discussed several papers on this topic. According to one, presented by Oleg Itskhoki of the University of California, Los Angeles, price growth as a result of bottlenecks during COVID-19 was more persistent in America than elsewhere.
Although difficulties in the Suez and Panama canals echo recent history, the context is very different. Rich-world policymakers are no longer attempting to use fiscal and monetary policy to juice demand. The global economy is also not trying to adjust to a shift from services to goods, which economists considered another culprit for snarled supply chains.
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Source: Economist
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