Economic impacts

Daily update

Events in the Gulf make dramatic viewing. The humanitarian cost of war is always horrible. The economics of the current situation are less dramatic. The inflation consequences depend on a sustained increase in oil price, not a spike. The world has become less oil dependent to produce economic activity. However, the US affordability crisis may be affected—perception rather than reality matters to affordability, and gasoline prices affect inflation perceptions.
There are reports of Houthi threats against Red Sea shipping, which might force goods to sail the long way around. That would increase freight costs, but freight costs are a relatively small part of import prices, import prices are typically 40% of imported goods’ consumer prices, and imported goods are a fraction of inflation. The inflation impact of this, as in 2023, is likely muted.
Over the longer term, there may be an impact on the US fiscal deficit—US President Trump indicated a campaign lasting some weeks, which could be costly. For the Gulf region, although the peak tourism season has passed, there could be reputational damage arising from social media coverage. That might also have a bearing on decisions of the nomadic wealthy.
German retail sales were weaker than expected in January, but revised significantly stronger in December (of course).