Oil turmoil reminds markets of inflation sore spots

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LONDON, July 6 (Reuters) – OPEC + spirit of initiative has pushed oil prices to $ 80 a barrel, the highest since 2018, threatening to upset central banks’ transient inflation rhetoric as well as post-pandemic economic recovery.

Last year’s Saudi-Russian oil war showed that disputes among OPEC + members don’t always lead to price hikes, but this week’s standoff within the group pushed prices up, building on cumulative gains of around 50%.

Many traders don’t expect a return to $ 100 a barrel, from levels last seen in 2014. read more

Brent futures slipped around 3% on Tuesday, but if prices persist at those levels or rise, inflation may turn out to be more sustained than expected. This will increase the stakes on central banks to conduct an ultra-easy monetary policy.

Here are some potential pressure points:

1 / PACE OF CHANGE

The percentage change in oil prices from year to year is at levels not seen more than 40 years ago.

Prices – currently around $ 75 a barrel for Brent crude futures – are only half of what they were in 2008. But markets are used to being afraid of rapid moves, a said Christian Keller of Barclays.

“The rate of acceleration is much faster than what we have seen even after the global financial crisis,” Keller said. “And while many expect the effects to be temporary, they are greater than we thought they would be, even temporarily.”

2 / HERE TO STAY?

Investors, central bankers and policymakers are questioning whether the recent rebound in inflation is transitory or real.

Citi’s surprise inflation index has hit record highs in the United States and multi-year highs in many other places, indicating inflation readings are higher than expected.

A mix of bottlenecks, abundant global liquidity and soaring prices for basic commodities, especially food, has added to price pressures. The increase in oil adds a new dimension to the debate.

“Oil prices come into play because of the potential impact they could have in causing this transitory rise in inflation to become a bit more over the medium term,” said Massimiliano Castelli of UBS. .

Rising oil to $ 100 a barrel could “have a negative impact on inflation expectations,” he added.

3 / FIRST LINE OF EMERGING MARKETS

About 80% of emerging market economies in terms of gross domestic product (GDP) are oil importers.

Many are more sensitive to price pressures, as food and energy make up a higher proportion of their inflation baskets. Some of them – like Russia or Brazil – have already been forced to raise their interest rates.

David Rees of Schroders calculates that rising oil prices to $ 100 a barrel could see energy inflation exceed 20% in emerging markets.

“(Oil price gains) would be a headwind for the recovery in oil-importing countries,” Rees said, just at a time when many developing economies have had to digest the hawkish backbone of the Fed.

4 / RETURN OF THE CURRENCY

A prolonged rise in oil prices would be negative for emerging market currencies which hit a record high last month. (.MIEM00000CUS)

The currencies of importing countries such as India and Turkey would likely be the hardest hit, although Russian ruble-exporting oil is a winner.

In developed markets, the Norwegian krone, already among the top three best-performing currencies since the start of the year, would benefit along with its Canadian counterpart – both major oil exporters.

The case of the US dollar is less clear: Historically high oil prices were negative for the dollar as they widened the US current account deficit, but that equation has changed in recent years, with the US becoming a net exporter of oil.

Rising oil prices resulting from increased demand suggest an ongoing global recovery, while supply-fueled squeeze has historically been associated with a depreciating dollar.

5 / GROWTH VS INFLATION

Headline inflation in the United States is 5% while in the euro zone it hovers around the European Central Bank’s target of close to but below 2%.

They may not be red flags, but it comes at a time when many fear economic expansion – especially in the United States and China – has peaked.

Even in Europe, where growth continues to accelerate, the impact of rising crude prices would be felt, potentially dampening consumer spending – a key part of the bloc’s economic recovery.

“Rising oil prices are a tax in Europe and can crowd out spending,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

A market-based indicator of long-term inflation expectations in the eurozone rose to nearly 1.65% on Tuesday, its highest level since 2018 – a sign that investors are positioning themselves for higher inflation. The gauge tends to move closely with oil prices. The five-year breakeven inflation rate in the United States, at 2.34%, is up sharply from a low of around 2.22% last month.

Reporting by Karin Strohecker, Saikat Chatterjee and Dhara Ranasinghe in London Additional reporting by Tom Arnold in London Editing by Sujata Rao and Matthew Lewis

Our Standards: Thomson Reuters Trust Principles.


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