Economy Europe’s inflation is up after months of decline. Could it delay interest rate cuts?

[LeonardoBjj]

BY DAVID MCHUGH
Updated 9:22 AM BRT, January 5, 2024

FRANKFURT, Germany (AP) — Inflation plaguing Europe rose to 2.9% in December, rebounding after seven straight monthly declines as food prices rose and support for high energy bills ended in some countries. The rise in price levels fueled debate over how soon interest rate cuts could be expected from the European Central Bank.

The figure released Friday was up from the 2.4% annual inflation recorded in November — but is well down from the peak of 10.6% in October 2022.

ECB President Christine Lagarde warned that inflation could tick up in coming months, taking a detour from its recent downward path. The central bank for the 20 European Union countries that use the euro currency has raised its benchmark interest rate to a record-high 4% and says it will keep it there as long as necessary to push inflation down to its goal of 2% considered best for the economy.

The faster-than-expected fall in inflation over the last months of 2023 had led some analysts to predict the central bank would start cutting interest rates as early as March.

The December rebound, however, was grist for analysts who predict that rates wouldn’t start to come down until June.

“The increase serves as a reminder that interest rate cuts in the first quarter are unlikely, but this shouldn’t dispel expectations of cuts later in the year,” said Bert Colijn, senior eurozone economist at ING bank.

Views differed on the significance of the higher inflation number. December’s increase was a “just a blip” that would be reversed in January, said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics. He foresees a first rate cut in April.

Inflation in December got a boost from the end of energy subsidies in Germany and France that had lowered prices a year ago.

Core inflation, which excludes volatile fuel and food prices, eased to 3.4% from 3.6% in November, according to European Union statistics agency Eurostat. The figure is closely watched by the ECB.

Food prices have fallen from painful double digits in several months last year, but still increased by an annual 6.1% in December.

Higher food costs led global supermarket chain Carrefour to announce this week that it will stop selling PepsiCo products in it stores in France, Belgium, Spain and Italy. The French chain pointed to price increases for popular items like Lay’s potato chips, Quaker Oats, Lipton tea and Pepsi soda.

The ECB and central banks around the world have rapidly raised interest rates to fight inflation. They work by raising the cost of borrowing for consumer purchases, particularly of houses and apartments, and for business investment in new offices and factories.

That lowers demand for goods and relieves pressure on prices — but it also can limit growth at a time when it’s in short supply in Europe. The economy shrank 0.1% in the July-to-September quarter.

Inflation itself, however, has been a key challenge to economic growth because it robs consumers of purchasing power. The ECB said raising rates quickly was the best way to get it under control and avoid even more drastic measures later.

Officials at the U.S. Federal Reserve also stressed the importance of keep rates high until inflation is “clearly moving down,” according to minutes of their Dec. 12-13 meeting released Wednesday. The Fed has signaled three rate cuts this year.
U.S. consumer prices were up 3.1% in November from a year earlier.
Inflation spiked around the world as the rebound from the COVID-19 pandemic strained supplies of parts and raw materials, then as Russia invaded Ukraine in February 2022, raising costs for food and energy.

Europe has since found other supplies of natural gas outside Russia to generate electricity, power factories and heat homes, so energy prices have eased.

Europe — and the rest of the world — is facing a possibility of new delays and higher prices for consumer products as attacks by Yemen’s Houthi rebels have scared away the world’s largest container shipping companies and energy giant BP from sailing through the Red Sea and Suez Canal.

https://apnews.com/article/inflation-europe-interest-rate-cuts-f44648c6a68657bd2c91aba72389ec22

 

[LeonardoBjj]

How Houthi Attacks in the Red Sea Threaten Global Shipping​

By Noah Berman
January 5, 2024 3:02 pm (EST)

Houthi attacks against commercial ships in the Red Sea have upended global shipping. The disruptions could soon ripple through the global economy.

Since mid-November 2023, the Yemen-based, Iran-backed Houthi rebel group has attacked dozens of commercial ships in the Red Sea, with no signs of slowing down. An exodus of shipping companies from the region now threatens to scuttle supply chains and increase consumer prices just as global inflation begins to ebb. The United States has announced an international security initiative to protect commercial vessels, but some experts say the effort falls short of the necessary deterrence, and others worry a forceful response could propel the region into wider conflict.

Why are the Houthis attacking ships in the Red Sea?​

The Houthis say their strikes are directed at boats with Israeli interests, and that the attacks will continue until Israel ends its war in Gaza. But in practice, the Houthis have targeted ships indiscriminately, experts say. Shipping is notoriously opaque, with vessel ownership and operation, crew nationality, and flag of registry often differing. Fearing attacks, major shippers including global leader A.P. Møller-Mærsk have announced plans to avoid the Red Sea and the Suez Canal—diverting some $200 billion in trade.

How could Houthi attacks affect the global economy?​

The Red Sea is one of the most important arteries in the global shipping system, with one-third of all container traffic flowing through it. Any sustained disruption in trade there could send a ripple effect of higher costs throughout the world economy. This is particularly true of energy: 12 percent of seaborne oil and 8 percent of liquified natural gas (LNG) transit the Suez Canal.

Avoiding the Red Sea means abandoning one of the most common global shipping routes from Asia to Europe. Indeed, 40 percent of Asia-Europe trade normally transits the sea. Ships shunning the Red Sea will have to instead sail around the Horn of Africa, which can cost $1 million more round trip in additional fuel costs. Still, more than one hundred fifty commercial ships have chosen the longer route since November. On the other hand, insurance premiums for ships using the Red Sea have shot up nearly tenfold since the attacks began.

Some shipping companies are already passing down these expenses. France’s CMA CGM, the world’s second-largest shipper by market share, recently announced that it would double its rates for shipping from Asia to Europe.

The Houthi strikes are only the latest in a series of disruptions that have highlighted the interconnected nature of shipping and its crucial role in the global economy. In 2019, Iran attacked several oil tankers in the Strait of Hormuz, leading many freight companies to opt for the Cape of Good Hope route. In 2021, a ship ran aground in the Suez Canal, holding up $10 billion in goods each of the six days the canal was clogged. Most recently, a drought in Panama has compounded shipping woes as the country’s namesake canal, through which 5 percent of global trade flows, is operating at a fraction of its usual capacity.

But as of early January 2024, these trials have yet to produce major price increases for consumers, especially in energy markets. The price of brent crude, a U.S. benchmark, remains lower than the October average, though it has flared after major strikes. Europe is likely to feel economic stress sooner than the United States, CFR Fellow Zongyuan Zoe Liu says, because the Red Sea is the only route to the Suez Canal, which links some of the largest European consumers of tradable goods to their Asian suppliers.

What can be done?​

To ensure freedom of navigation, long a primary goal of U.S. foreign policy, the United States has spearheaded a twenty-country naval task force to protect commercial ships in the Red Sea and the neighboring Gulf of Aden, and deployed aircraft carriers to the region. The coalition approach was also applied during the 2019 spate of attacks. However, that effort included regional powers such as Saudi Arabia and the United Arab Emirates, who experts say are unlikely to join the operation today.

Skeptics of this strategy argue that a defensive posture alone is unlikely to deter Houthi attacks. The Houthis are using relatively inexpensive weaponry, including drones, to wreak costly damage, and naval vessels cannot escort every commercial ship. As a result, “it’s harder now than it’s ever been” to protect commercial vessels in the Red Sea, says CFR Military Fellow John P. Barrientos, who has commanded ships in the region.

Some Pentagon officials and independent analysts argue that the United States should go on the offensive against Houthi positions in Yemen, citing a track record of deterrence. After Houthi rebels attacked commercial and U.S. military vessels in 2016, Washington responded with strikes of its own, and the Houthis stood down. “If the United States wants to protect freedom of navigation in the Red Sea and its environs, it is going to have to take the fight directly to the Houthis,” writes CFR Senior Fellow Steven A. Cook.

But such strikes could raise the risk of regional conflict, including with Iran, which has sent its own warship into the sea. The Houthis openly relish the idea of war with the United States, and unlike in 2016, they are no longer mired in daily conflict with their northern neighbor Saudi Arabia. Every option the West could take therefore has “serious downsides,” the Brookings Institution’s Bruce Jones writes. “Tensions and bad choices abound in the Red Sea—but they are also a harbinger of tougher choices and turbulent waters ahead.”

Will Merrow and Michael Bricknell created the maps for this In Brief.

https://www.cfr.org/in-brief/how-houthi-attacks-red-sea-threaten-global-shipping

 

[N13]

TL/DR

Got cliff notes?

 

[N13]

Europe doesn't have enough energy to support it's population and industry.

As the middle east war expands, it's only going to get worse for them. And the Suez canal situation is a serious problem because shipping energy to Europe goes through there. Shipping costs are up 400% already.

Inflation? That'll leave a mark.

 

[N13]

Wait and see what happens when a battleship is sunk in the Red sea and oil goes to $150 A barrel.