UK faces fresh inflation headache as Maersk suspends shipments
BRITAIN faces a fresh inflation headache after shipping giant Maersk paused all trade through the Red Sea.
Economists have warned that the disruption could drive oil prices and shipping costs higher, as attacks by Iran-backed Houthi rebels remain a threat for ships travelling through the strait. Maersk’s suspension comes despite a Us-led naval coalition patrolling the channel, with analysts predicting that oil prices could surge to $90 per barrel if tensions escalate.
Maersk had relaunched shipments through the Red Sea just before Christmas, although it subsequently rowed back on the decision after one of its ships was attacked on Dec 30.
It said yesterday that it will halt all transit through the channel “until further notice”. Maersk said: “An investigation into the incident is ongoing and we will continue to pause all cargo movement through the area while we further assess the constantly evolving situation.”
The disruption is already driving up shipping costs as ships are rerouted around the Cape of Good Hope in Africa.
Ole Hansen, head of commodity strategy at Saxo Bank, said oil prices will probably settle in the low $80s, around $10 higher than in early Decem- ber. However, he added: “If we see any escalating risks, it will probably move closer to $90.”
In turn, this will flow into higher petrol prices and energy costs, meaning inflation could stay higher for longer, making it harder for the Bank of Eng- land to cut interest rates.
The price of Brent crude was volatile yesterday, surging more than 2pc to surpass $78 per barrel before falling back to $76.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said: “Red Sea tensions may push central banks to keep interest rates higher for longer, adding to the downward pressure on economic activity.”
Paul Dales, chief UK economist at Capital Economics, said: “The Bank of England is alive to the risk that a surge in the oil price means that inflation falls slower than it expects.”
Oil prices would need to hit $100 per barrel before it would affect the timing of the Bank’s rate cuts, Mr Dales said. Capital Economics currently forecasts that CPI inflation will fall below the Bank’s 2pc target in April 2024. This is based on an expectation that oil prices will hit $75 per barrel by the end of this year. If oil prices were to rise to $100, this would keep inflation above 2pc until May 2024, Mr Dales said.
Chris Hare, senior economist for UK & Europe at HSBC, said that the Bank of England could pay more attention to the inflationary risks of higher oil prices than usual because the economy is already grappling with second round effects from earlier price surges.
The prospect of higher inflation would pose a major problem for Rishi Sunak, the Prime Minister, in an election year, as he has cited falling inflation as a key justification for tax cuts in the spring.
Martin Beck, chief economic adviser to the EY Item Club, said: “If inflation did pick up, it would make it harder to cut taxes again.”
Rising tensions in the Middle East have also led to a boost for British defence stocks.
The UK benchmark for defence and aerospace companies surged by as much as 1.4pc to 8,710.43 points yesterday, the highest figure on record.
Among the winners was Babcock International, which jumped 6.3pc, or 25p, to close at 420p.