Middle East Shipping Risks Fuel Eurozone Core Goods Inflation Fears

Societe Generale economists warn that middle east shipping risks could keep eurozone core goods inflation elevated. Tensions in the Middle East have added to supply chain strains seen after Covid in 2020-21 and those linked to the war in Ukraine since 2022.

The economists used an adaptation of the New York Fed's Global Supply Chain Pressure Index (GSCPI) to build separate gauges for Europe and Asia, assessing how trade disruptions through the Strait of Hormuz affect each region. Their framework suggests supply chain pressures eased over the summer but remain elevated, with firmer demand implying a continued inflation impulse into this year and next.

Across scenario analysis, Societe Generale projects euro area non-energy industrial goods inflation to peak at 1.8% in 2H27 before returning towards normal levels. They recommend that derivative traders increase exposure to Eurozone inflation-linked swaps, particularly in the one- to two-year tenors, due to medium-term core price pressures.