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TL/DR: A series of restrictions are being placed on ships entering the Panama Canal, as water levels decrease due to drought. Economists warn that the disruption could cause U.S. inflation to spike.

A record drought in Panama has seen water levels drop dramatically and has caused the Panama Canal to expand restrictions on the largest ships crossing the waterway. Ships using the canal, which joins the Atlantic and Pacific, make up around 3.5% of global trade, and a disruption to traffic could have significant knock-on effects on supply chains around the world and U.S. consumers’ wallets.

Commodity analysts are watching the situation with concern; the new restrictions could see the volume of cargo aboard ships in the Neopanamax category, the largest vessels that can use the canal, drop by 40% in order to float higher in the shallow waters of the canal. Ships of this size will thus have to take longer routes around South America, or have their cargo distributed across multiple ships. In either scenario, these increased shipping costs will lead to a spike in the price of consumer and industrial goods and potentially drive inflation in the U.S.

What happens now? The largest ships navigating the Panama Canal will have restrictions placed on them from Sunday onwards, and further restrictions are planned in the coming weeks. If the drought does not improve, authorities in Panama have stated that they will extend the restrictions beyond Neopanamax category ships to also include smaller but more ubiquitous Panamax-class vessels in July, further jeopardizing trade. And the canal’s administrator, Ricaurte Vasquez, has said he had not ruled out the “extreme measure” of limiting daily transits on the waterway from 36 vessels to just 28 if the situation worsens further.

Deeper reading: Chart Shows Dramatic Drop in Gatun Lake Levels as Drought Hits Panama Canal