Citigroup Sees Oil Forcing Up Inflation Faster Than Historically

(Bloomberg) -- The recent surge in the price of oil is set to propel global inflation faster than historically and by more than investors are anticipating, in part because key central banks are unlikely to respond by tightening monetary policy, according to Citigroup Inc.

In a report sent to clients on Friday, economist Pernille Henneberg estimated that a 10 percent rise in crude prices would lift headline inflation by about a quarter of a percentage point in the U.S. and the euro-area and by 0.21 point in the U.K. over a year. The upside surprise could be as much as 0.2 point higher than what markets now expect, she said.

The price of Brent crude oil has risen about 20 percent in the past three months to around $77 a barrel.

That may force up inflation faster than typically because general prices are “sensitive to increasing oil prices while labor markets are tight in a number of countries” and as “central banks may be more cautious than in the past to react,” Henneberg said.

Central banks such as the Federal Reserve are likely to ignore an oil-driven pickup in prices because they are focused on pushing inflation back to target and may view any acceleration as temporary, she said. The Fed may still be more responsive than the European Central Bank and the Bank of Japan given its economy is stronger.

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