Money Rehab with Nicole Lapin - The Red Sea Is an Economic War Zone - Here's How It Affects Inflation

Episode Date: December 26, 2023

The latest conflict in the Middle East is a war that is entirely on an economic battlefield: the Red Sea. Nicole explains what you’ll see in the headlines soon, what you need to know now, and how to brace yourself for the economic fallout.

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every occasion, and every celebration. Be sure to check them out at justinwine.com and receive 20% off your order for a limited time. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. When the war broke out in Israel on October 7th, we covered it a lot on the show because it's a story that I promised you would affect the global economy and therefore you, no matter where you are. More than two long months later, we're seeing the financial ripple effects more than ever in a war that's entirely on an economic battlefield right now. The conflict in the Red Sea. Usually when I meet you here to chat

about breaking news, my primary objective is to unpack the headlines without the jargon. But this is different because to be honest, I am seeing very few headlines about this yet, which is pretty surprising because this bubbling conflict has massive implications for international trade, the American economy, geopolitics of the Middle East, and whether the U.S. would actually engage in war in that part of the world. So my mission today isn't so much breaking down the headlines, but giving you a sneak peek of what you'll see in the headlines soon, telling you what you need to know and showing you how to brace yourself for potential economic fallout. The Red Sea is one of the busiest trade routes in the world. It literally moves markets, but most notably, it's the trade route of choice for Chinese products heading to

Europe. 30% of all ocean container traffic goes through the Suez Canal that's part of the Red Sea route. Beyond Chinese-made products, this is also a common route for energy. About 12% of global oil goes through the Red Sea, and 8% of liquefied natural gas goes through the Red Sea. But now, that commercial lifeblood has become a war zone. After Israel's counterattack campaign against Hamas in Gaza, the Yemeni rebel group the Houthis pledged their support of Gaza. The Houthis said that they would mount attacks in the Red Sea against vessels that were headed for Israel or even vessels that represented support of Israel

and would continue these attacks until aid reached Palestinians in Gaza. Last month, the Houthis seized an Israeli cargo ship and have used drones and ballistic missiles to attack commercial vessels. Who are the Houthis? The Houthis are a rebel group that fought to overthrow the Yemeni government in 2014 and have controlled a large part of that country ever since. For the last decade, there has been a brutal civil war in the country. Hundreds of thousands of people have died and millions of people have been displaced. Beyond contempt for the Yemeni government, the Houthis are also outspoken against Israel, the United States, and basically all of Western values.

The Houthis have been supported by Iran and the terrorist group Hezbollah. On the other side of the conflict supporting the Yemeni government, we have Saudi Arabia, the UAE, and occasionally the United States. In response to these attacks in the Red Sea, several big transport companies have said they're diverting ships away from the Red Sea. Companies like Mediterranean shipping company Maersk, the oil company BP. Marsk, by the way, is one of those invisible giants that you might have never heard of, but ships for all of the companies you have definitely heard of, like Macy's, Walmart, the NFL, American Eagle, Levi's, Skechers, the list goes on and on. But let's get out of the Red Sea for a second and follow the

money trail back to our backyard. Like I said, the Houthis' threats are mostly affecting the trade route between China and Europe, so the European economy will certainly be more affected than the United States. However, the U.S. will feel the ripple effects where our economy intersects with Europe. For example, in the United States, we buy Volkswagen cars. Volkswagens get their parts from China. If China can't get through the Red Sea, it means that shipping containers will instead have to go around South Africa, which is 25-ish percent longer of a trip and therefore a much more expensive trip. More expensive operations mean more expensive products, which means, once again, things we want costing more. Plus, even though we'll be less affected in the U.S., all the progress that we have made to curb inflation is now at serious risk.

Over the last few weeks, the outlook on inflation has been pretty good, and there's even hopeful chatter about interest rate cuts next year. But big retailers have said that they've been able to bring prices down because ocean freight prices have been going down since pandemic level highs. During the pandemic, freight capacity was down 20%, but demand was up 20%, and ocean freight pricing was up 10x. Because there isn't this increased demand that there was for goods during COVID, some pros don't expect ocean freight pricing to climb up to that 10x surge pricing that we saw during the pandemic. But ocean freight pricing is climbing up to 3x now. So if one of the victories we've been able to score on inflation is due to sinking

ocean freight costs, rising ocean freight costs is a not-good sign for our soft landing that J-PAL has been working oh so hard for. Us money rehabbers aren't the only ones who know how much this conflict could hurt our wallets. Again, this is a super valuable trade route, so many economic powerhouse countries are joining together to counter the Houthi acts of aggression. Even unlikely allies like China will probably join in at some point because of just how much is at stake at the Red Sea. What's now taking shape is an international naval operation spearheaded by the U.S. called Operation Prosperity Guardian that aims to do exactly what it sounds like, protect the commercial

ships in the Red Sea. There's a lot of prosperity there. Since the operation was announced, Maersk said that it would resume shipping through the Red Sea. When something big happens in the world, my mind, of course, always goes to the economic consequences. But since October 7th, I also do find myself thinking about the long history of conflict in that part of the world. Unless you work in an industry where logistics and supply chain are more than just buzzwords, you probably don't think about the Red Sea all that often. But if you've had any sort of religious upbringing, you might be thinking that Red Sea sounds kind of familiar. And there's a good chance that it is because the

Red Sea is mentioned in the Torah, the Bible, and the Quran. But in case you don't know this one, this is the story of Moses guiding the Israelites who were fleeing from the Egyptian army to the Red Sea. God then parts the Red Sea for Moses and the Israelites, but when the Egyptian army follows behind, the Red Sea snaps back together and closes in on the army. With all of the conflict going on right now in the Middle East, it sometimes feels like nothing short of an actual Torah, Bible, Quran-esque miracle would make a difference. But as perhaps trite as it sounds, I do believe in the miracle of money. If financial interests are aligned, adversaries have a weird way of becoming allies. Not to belittle Moses or anything, if you're religious, he's a pretty big deal. But it's easier to separate than

to unify. After all of the trauma coming out of the Middle East over the last two months, I have no rose-colored glasses on when looking at what a path to resolution could actually look like. I'll give it to you straight, though. I think this conflict will dampen the improved economic outlook that we've had in the United States as of late. But I do believe that we have enough power on our side to keep commercial activity moving in the Red Sea, even in the face of these obstacles. And when we feel the turbulence from those obstacles, and I believe we will, I will be right here helping you course correct. For today's tip, you can take straight to the bank. One of the first places you're going to feel this conflict in the Red Sea is at the gas pump. One easy way to protect your

wallet when gas prices do jump is to give your tires a little extra air next time you're at the gas station. That extra five minutes will improve your fuel economy so that if gas is pricier, you can still save because you are using less of it. price here, you can still save because you are using less of it. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content.

And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.