Just as the Yanks got a great inflation reading where their Consumer Price Index (CPI) actually fell 0.1% in June, we learn that we could face a spike in many product prices because of shipping troubles in the Red Sea and Asia that will force up costs and inflation!

The AFR’s Tom Rabe and Jenny Wiggins put the problems in a nutshell with the following: “The continuing threat of attacks on commercial ships by Yemen’s Houthi militants off the Horn of Africa has forced vessels to reroute around the southern tip of the continent in what shippers say has become a “new normal” that adds weeks to their journeys and contributes to the worst congestion at the Port of Singapore since COVID-19.”

For those not strong on global geography, the Horn of Africa is in the Northeast of the continent, which carries the Red Sea, into which the Suez Canal empties. If this shortcut becomes too dangerous, then ships have to go around the Cape of Good Hope in South Africa on the way to Singapore.

This diversion adds on two weeks to a cargo ship’s trek from Rotterdam to Singapore, making it a six week trip.

And then there’s an additional problem for Singapore’s harbour as China-based companies send additional exports to the US ahead of a potential hike in tariffs from a new US President Trump! And that Biden debating disaster was no help to that challenge for Asian seabound trade.

Well, how costly is all this?

Here’s what the AFR team have to say again: “Average ocean freight rates for 40-foot shipping containers are up nearly 300 per cent in the past year including a 10 per cent jump in one week this month to US$5868, consultant Drewry says.”

CEO of Nick Scali, Anthony Scali, says contracts get ignored by the shipping businesses and elevated costs get loaded onto the customer. This is bad for CPI readings because it has been product inflation that had been falling, while services inflation has been the key driver of what is called ‘sticky’ inflation.

All this will increase wait times for key goods for consumers and the likes of builders will now have to deal with delays in getting supplies. This could be like a mini-pandemic supply-side problem for imports, which was the start of our inflation crisis.

The consequences could be:

1. The Reserve Bank will need to raise rates to force many consumers not to spend on inflation-affected goods.
2. This will hit business profits.
3. Unemployment will increase by more than expected.
4. We could see our economic slowdown develop into a recession.

During the week, head of the Federal Reserve in the US, Jerome Powell, warned that it was dangerous for the economy’s growth to keep rates too high for too long. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment,” Powell told US politicians on Capitol Hill, Washington.

This is the dilemma for our RBA boss, Michele Bullock. It would be made easier for her if these higher shipping costs that add to inflation are more than offset by lower spending and prices because of the 13 rate rises, and the fact that most borrowers are now on higher variable rate home loans.

That said, one piece of Australia adding to inflation has to be Thredbo, where I was charged $34 for a six pack of Peroni yesterday, and that was after a large and a regular coffee hit me for $13!

By the way, following the fall in inflation in June, the money market traders now are pricing in a 93% chance of a rate cut in the US after the September Fed meeting.

Lucky ducks!