Inflation breaks records, oil at $100 also looms






Already less transitory than expected, central bankers’ inflationary puzzle may be about to get worse as they face the prospect of oil above $100 raising consumer expectations for oil. prices and intensifies upward pressure on wages.

Brent crude futures, which soared 50% in 2021, are up another 14% already in 2022, to seven-year highs of $89 a barrel. With tight production capacity, low inventories and the geopolitics of several producing regions, oil is rushing towards $100, a level Goldman Sachs expects to hit by mid-year.

JPMorgan predicts oil could hit $125 a barrel this year and $150 in 2023, Reuters reports.

It’s possible that the net impact of a $12 price hike from here won’t be massive, as headline inflation rates already reflect jumps in energy prices from a year ago. year. Meanwhile, economies, especially those in the West, are using much less energy than just a decade ago.

Rate hikes in countries like Britain and Norway, and hints from central banks such as the US Federal Reserve, which could signal next week how quickly it plans to tighten policy, have dampened expectations of a inflation to follow rising oil prices.

But policymakers had expected base effects to play out as the 2021 oil surge subsides, tempering year-on-year inflation.

Many also argue that the psychological impact of $100 oil cannot be underestimated, especially as consumers, businesses and politicians worry about inflation at multi-decade highs; the last US consumer price reading was 7%, a 40-year high.

Wednesday’s data showing UK consumer inflation at its highest level in 30 years underscores how the energy effect is trickling down to food and hotel prices.

“It could be the icing on the inflation cake if we don’t get energy prices to moderate,” said Frederik Ducrozet, strategist at Pictet Wealth Management.

“This time it’s a bit different because we’re already at a point where the risks are high and central banks are worried about a wage-price spiral as energy prices contribute to second-round effects. “

Citi’s surprise inflation indices hit record or multi-year highs in Europe and elsewhere, indicating the numbers are higher than expected.

OIL ISSUES

If oil hits $100 and stays there, it will upset policymakers’ calculations – European Central Bank projections, for example, assume Brent is at $77.5 in 2022, falling to 69.4 dollars by 2024.

Crucially, it could also incentivize companies to pass the costs on to consumers or workers to demand higher wages. These so-called second-round effects can cause a wider inflationary spiral that pushes central banks to act.

The effects differ from country to country, but in the Eurozone, a 10% rise in oil prices adds around 0.5% to inflation, although the direct effects tend to fade quickly.

For the United States, a November paper published on the CESifo Research Network by two Dallas Fed researchers estimated that a $100 oil scenario would raise the PCE inflation gauge year-on-year by 1.8. percentage point (pp) by the end of 2021, and 0.4 pp by the end of 2022.

The core personal consumption expenditure index, the Fed’s preferred measure of inflation, would rise 0.4 pp and 0.3 pp in 2021 and 2022, respectively. This would see household inflation expectations one year ahead increase by 1.2 pp but add only 0.2 pp to five-year expectations, according to the study.

For some, second-round effects are already here, with the US economy near peak employment and average hourly wages jumping 0.6% in December. Britain, where job creation is at record highs, is considering minimum wage hikes to ease the pain of fuel bills.

Wage pressures have not yet appeared in the euro zone. But given rising energy bills, Jorge Garayo, senior inflation strategist at Societe Generale, believes $100 oil could create a sticky inflation environment that encourages demands for higher wages.

Anticipating calls for tougher policy within the ECB, money markets are betting that rates will rise later this year. The ECB’s Isabel Schnabel said the recent rise in energy prices may force the bank to stop “looking past” high inflation and act to temper price growth.

What happens to oil prices when strong winter demand wanes is now key. The coming months should also show whether other inflationary elements such as electricity prices and supply bottlenecks ease. Finally, if expensive oil starts to hurt consumption and slow economic growth, energy demand tends to self-correct.

Massimiliano Castelli, head of strategy, Global Sovereign Markets at UBS Asset Management, expects oil to remain in the range of $60-$80 a barrel.

“If we see inflation consolidating, at levels above current official forecasts, all central banks could be forced to adopt more conservative approaches, including the ECB,” said Antonio Cavarero, chief investment officer at Generali Insurance Asset Management. “But that remains to be seen.”

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