Goldman Sachs Discusses Impact on Inflation
According to Goldman Sachs, while the spike in international shipping costs has raised concerns about inflation, the impact is expected to remain moderate. Inflation in the US has cooled down from its four-decade highs, but there are apprehensions that prices could tick higher due to attacks by Iran-linked militants.
Concerns over Price Pressures and Potential Rerouting
Analysts have cautioned that price pressures may resurface as multinational firms reroute their vessels away from the Suez Canal to avoid attacks. Longer travel routes have been chosen instead, which could lead to renewed inflation concerns.
Goldman Sachs’ Perspective
In a note published Monday, Goldman Sachs strategists, led by Jan Hatzius, highlighted the significant increase in freight rates for vessels traveling from Asia to Europe, which have climbed by 350%. Those moving from Asia to the US have seen a jump of 100%. Despite this, Goldman Sachs maintains that there are two key reasons why goods inflation is unlikely to see a significant increase.
Reason 1: Current Shipping Spike Occurs Against a Benign Macro Backdrop
Goldman Sachs points out that the spike in shipping costs is not accompanied by factory shutdowns or a surge in demand, unlike the situation at the tail-end of the pandemic when goods inflation soared. The strategists believe that the current increase lacks the amplification of cost pressures seen previously.
Reason 2: International Transport Costs Account for a Small Share of Consumption Goods
Goldman Sachs also highlights that international transport costs only make up around 1.5% of final consumption goods on average. Therefore, even with a 100% increase in sea freight costs, core goods inflation would only rise by approximately 0.4pp, and overall core inflation would increase by around 0.1pp. In an extreme scenario where costs are fully passed on to consumers, year-over-year inflation may climb by 0.2pp.
Goldman Sachs’ Forecast
Goldman Sachs’ base-case forecast predicts that the Red Sea-induced climb in shipping costs will cause global core inflation to increase by about 0.1pp in 2024. The impact is expected to be larger in Europe compared to the US.