What’s going on here?
The US and UK commenced strikes against the Houthi militant group in Yemen.
What does this mean?
Many of the world’s most powerful armed nations have been at loggerheads over the last couple of years. So these days, the slightest threat of conflict can make folk call up a nuclear-bunker specialist. Thing is, the Iran-backed Houthi movement isn’t exactly popular in the Middle East. In fact, Saudi Arabia waged its own unsuccessful war against the group in 2015. So this pushback from the West isn’t likely to spill over into the region at large – but with the Houthi group vowing to keep targeting freight ships in the Red Sea, the battle won’t be quickly won or lost.
Why should I care?
For markets: This is our issue.
The US and UK are making it clear that their red lines aren’t just written in ink. But no matter how much they reinforce their boundaries, the Houthis aren’t guaranteed to respect them. If the militant group keeps compromising cargo ships and oil tankers, goods traders will need to take longer – read: pricier – detours around Africa. That’ll make the contents of every precious shipping container more expensive. And don’t count on retailers to take the hit: they’ll pass on every cent they can to their customers, potentially stoking up inflation just when it’s showing signs of losing steam.
The bigger picture: The new normal.
Naturally, higher prices for oil and commodities will make just about everything on a store shelf more expensive. But no company wants to keep prices up for too long, otherwise budget-conscious shoppers could take their business elsewhere. That means they’ll cut costs elsewhere in their supply chain or switch to cheaper suppliers. So while conflict can spike costs at the time, the effects tend to level off after a few weeks or months. Just think: despite two wars raging, today’s oil price is lower than it was right before Russia invaded Ukraine.
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Originally Posted January 12, 2024 – The Red Line
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