In the months since Hamas’s attack on Israel and the subsequent ground invasion of Gaza, regional security has deteriorated. In particular, Houthi attacks have disrupted commercial shipping, resulting in increased global shipping costs.

These developments represent an escalation from our original ‘contained Gaza ground invasion’ base case and look more like our ‘escalation to other Iranian proxies’ alternative scenario.

Our updated base case envisages continued near-term disruption to shipping, but an eventual degradation in Houthi capabilities such that maritime trade links subsequently normalise.

The increase in shipping costs may put upward pressure on global inflation. IMF modelling suggests that, if sustained, the run up in freight rates would add perhaps 0.7% to headline CPI over a year. 

But the actual impact is likely to be smaller, partly because our base case scenario doesn’t envisage maritime disruption lasting. The supply chain disruption is smaller than during the pandemic. However, these inflationary risks may delay the start of easing cycles relative to market pricing.

But there is a meaningful risk of additional escalation should the US fail to restore deterrence. Israel may also escalate the conflict by switching focus to its northern border. Were global oil flows to be disrupted, the global inflationary consequences would be greater.

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