A spike in only crude oil towards $100 a barrel for the first time since
2014, would deal a double blow to the world economy. The double hit is to
weaken the outlook for economic growth and increase inflation.
The two threats are worrying for the Fed and other central banks, which are
trying to contain the strongest price hike pressures in decades without
thwarting recovery from the Covid-19 pandemic.
Finance ministers from the G20 group of countries will have a virtual
meeting this week for the first time in 2022. Inflation is one of their
concerns.
Although energy exporters have benefited from booming oil prices, the impact
of oil on the economy is not what it used to be. Much of the world will be
hit as companies and consumers find bills to rise and spending power
squeezed by higher prices for food, transportation and heating.
According to Bloomberg Economics' Shok model, a rise in crude oil prices to
$100 by the end of this month from around $70 at the end of 2021 would lift
inflation by about half a percent in the US and Europe in the second half of
the year.
More broadly, JPMorgan Chase & Co warned, a rise in oil prices of up to
US$ 150 per barrel would almost halt global expansion and send inflation
soaring to more than 7%, more than triple the level targeted by most
monetary policymakers.
“The oil price shock fed what is now a broader inflation problem. There's a
decent chance for a significant slowdown in global growth as a result," said
longtime Fed official Peter Hooper, now head of global economics research at
Deutsche Bank AG.
Oil prices are already up 50% from last year's prices and this is part of a
broader commodity price rally that is also sweeping away natural gas.
Drivers include a resurgence in worldwide demand after the lockdown,
geopolitical tensions fueled by oil giant Russia and strained supply chains.
The prospect of a renewed Iran nuclear deal has sometimes cooled markets.
The energy crisis is also adding to ongoing stress on global supply chains,
which is driving up costs and delaying raw materials and finished goods.
Goldman Sachs Group Inc. estimates oil prices could reach US$100 in the
third quarter. The company estimates a 50 percent price increase will lift
headline inflation by an average of 60 basis points where developing
countries are predicted to be hardest hit.
The International Monetary Fund (IMF) recently raised its forecast for
global consumer prices to an average of 3.9% in developed economies this
year, up from 2.3% a year earlier. While in developing countries it is
estimated at 5.9%.
"With inflation currently at its highest level for decades and the
uncertainty surrounding the inflation outlook unprecedented, the last thing
a global economic recovery needs is a rise in energy prices," HSBC
economists Janet Henry and James Pomeroy said in a Feb. 4 report. .
China, the world's biggest oil importer and exporter of goods, has so far
enjoyed tame inflation. But the economy remains vulnerable as producers have
juggled high input costs and fears of energy shortages.
With price pressures proving to be stronger than previously thought, central
bankers are now prioritizing inflation over demand support.
Consumer prices or inflation in the US staggering to a four-decade high sent
shock through the system, raising bets that the Fed will raise rates seven
times this year, a faster pace than previously thought.
Bank of England (BoE) Governor Andrew Bailey this month partially justified
the decision to raise UK interest rates by pointing to pressure from energy
prices.
European Central Bank President Christine Lagarde recently said that
officials will carefully examine how energy prices will impact the economy.
The Reserve Bank of India on Thursday also flagged oil prices as a risk.
