Canal Crises Could Make Retailers Raise Prices

Ongoing disruptions at two major shipping chokepoints—the Suez Canal and the Panama Canal, could raise prices for some U.S. retailers, some of whom could pass their costs on to customers.

What’s Happening With The Canals?

Supply chain snarls are making cargo shipping more costly: shipping container rates have nearly tripled since late October, when Houthi rebels in Yemen began attacking vessels in the Red Sea, according to the Drewry Container Index.

At the same time, a drought in Panama is reducing the capacity of the Panama Canal, and both crises threaten to raise costs for companies that sell a lot of stuff imported from overseas, analysts at investment firm Wedbush Securities said in a commentary Monday.

Why Does It Matter To You?

Retailers that rely on imports, including Floor & Decor (FND) Best Buy (BBY), Wayfair (W), and RH (RH), the company formerly known as Restoration Hardware, could all see their profit margins squeezed, and in some cases would raise prices, Wedbush analysts said.

While the impact has been limited so far and has hit Europe harder than the U.S., the disruptions could deal a major setback to the U.S. economy if they drag on for a long time, analysts at several firms said. Supply chain disruptions from the COVID-19 pandemic were a major reason inflation flared up in 2022, and the end of those disruptions helped push inflation back down over the last year. Shipping snarls could hinder that recovery.

“The impact to supply chains and shipping costs have widespread implications,” Candace Browning, head of global research at Bank of America, said in a commentary. “As more traffic is being rerouted away from the Suez Canal, shipping costs are rising, posing inflationary risks.”

How Bad Could It Get?

Its likely not as severe as the massive disruptions, and surge of inflation from COVID-19, analysts said.

“These effects may impact global supply chains, but it shouldn’t be anything like as bad as seen during the pandemic when Covid snarled up the entire end-to-end supply chain,” Simon Heaney, senior manager of container research at Drewery, said in a commentary last week.

Not only did the pandemic lockdowns cause shipping delays, people shifted their spending to buy stuff rather than services since restaurants and other businesses were closed. It was a combination that stoked inflation to the highest in four decades and that’s unlikely to happen again.

“These days demand is much more pedestrian now that government stimulus has wound down and spending habits have reverted back to services as we’ve all been let out to play,” Heaney said.

Still, higher shipping costs could fuel at least some price increases, even if it’s not as severe as the pandemic era.

“We must acknowledge that higher shipping rates could reignite inflation if these costs are passed on to consumers,” Wedbush analysts said.