Oil Price Jitters Unlikely to Spur Uptick in Global Inflation
Oil Price Jitters Unlikely to Spur Uptick in Global Inflation
(Bloomberg) --
An oil price spike from tensions between the U.S. and Iran is unlikely to lessen the vice-like grip that lowflation has on the world economy.
That’s because higher prices on the back of a supply shock -- rather than roaring factory and consumer activity -- ultimately hurts companies and households, thereby keeping a lid on broader inflation pressures.
Oil prices jumped Wednesday on news that Iran started attacks on U.S. military bases in Iraq in retaliation for the killing of Iranian General Qassem Soleimani last week. U.S. prices touched the highest since April last year.
“A supply-driven oil price shock will likely lead to demand destruction and has an adverse impact on aggregate demand, which will eventually pave the way to downward pressures on core inflation,” according to Chetan Ahya, chief economist at Morgan Stanley. “This would compound the existing issue of persistently low core/underlying inflation in developed markets.”
The tensions are another complication for central banks desperate to boost growth and inflation in their quest to skirt economic stagnation. Former European Central Bank President Mario Draghi and ex-Federal Reserve Chair Janet Yellen last weekend warned the U.S. and the euro area face daunting economic challenges in a world of low inflation and interest rates.
“Ultimately, a negative confidence shock is deflationary,” said Gabriel Sterne, head of global macro research at Oxford Economics in London.
Bloomberg Economics estimates that an increase in Brent crude prices to $100 a barrel from around the current $70 would trim about 0.2-0.3% from global GDP by the start of 2022.
What Our Economists SayA spike to $100 wouldn’t feel like it did when oil last rose from $75 to $100 in 2010 and 2011. Taking the U.S. as an example, the price of other goods and services in the economy have risen by more than a 10th since then, so the shock to the relative price of oil is much smaller. In real terms, $100 oil today feels more like $86.--Ziad Daoud, Jamie Rush and Tom Orlik |
Rising oil prices impact economies in different ways. Indeed, emerging markets that dominate the list of oil-producing nations could earn greater revenues, helping to plug current-account deficits. On the other hand, countries that are net energy importers would see household income and spending hurt, and headline inflation could accelerate in the near term.
On the whole, it’s likely that the oil rally will only trigger a temporary move in headline inflation, but not much more, said Torsten Slok, chief economist at Deutsche Bank AG.
“Combined with the negative impact on GDP we don’t see the move in energy prices so far as a meaningful risk to inflation,” he said.
--With assistance from Sharon Cho.
To contact the reporter on this story: Enda Curran in Hong Kong at ecurran8@bloomberg.net
To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Andrew Atkinson
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