Shipping costs spike put lower interest rates at risk

The rise in global shipping costs could spell bad news for the fight against inflation, with the risk that interest rates could stay higher for longer.

Shipping costs have soared and some rates have trebled in recent months, with disruptions at two vital links – the Red Sea and the Panama Canal.

The Red Sea has faced disruptions due to attacks on shipping by Yemen’s Houthi rebels, while the Panama Canal has faced low water levels.

ASB senior economist Mark Smith said the impact on inflation would depend on how long shipping costs stayed up.

He said weak demand meant the inflation impact would be lower than the Covid-19 supply chain crisis from 2021-23.

But he said the worry was that if the recent increases in shipping costs continued, it could reduce the likelihood of inflation falling below 3 percent by the end of the year.

It meant interest rates could stay high for longer.

“That’s a potential risk if this pick up in shipping costs flows through to a generalised increase in inflation. That is certainly the case – that it is a risk,” Smith said.

“But our view though is that the consumer demand environment now is weak, and we do not think this will have a generalised impact on inflation.”

Smith said the Reserve Bank (RBNZ) knew that such price shocks would temporarily increase inflation, but also made people worse off, poorer and would weigh on economic activity.

“Freight is only one of the costs impacting consumer prices and firm profitability. Labour cost pressures – which usually constitute a larger portion of firm costs – look to be cooling,” he said.

Smith said the next RBNZ move would be a cut, and ASB maintained its forecast of a rate cut in February 2025.

ASB continued to forecast New Zealand headline inflation to dip below 3 percent this year despite the upside risk from shipping costs.

According to the news on Radio New Zealand

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