'Third wave' of inflation looming as oil prices surge
A third wave of inflation is looming after oil prices spiked following Hamas's deadly attack on Israel, economists have warned.
The price of Brent crude surged as much as 5% on Monday to hit USD89 a barrel amid fears that the war will escalate tensions in the Middle East, potentially triggering sanctions and supply shortages.
It came as Israel's central bank was scrambling to stabilise the economy after its currency fell as much as 2.7% against the dollar, a seven-year low.
Meanwhile, the dollar surged as investors fled to safe haven assets, also sending gold to a one-month high.
Economists are also worried about the threat of a global recession in the event that the US and Saudi Arabia are further drawn into the turmoil.
Israel is not an oil producer but there are concerns over Iran's involvement in Hamas's shock attack on Saturday which saw 250 people killed. If the US tightens sanctions on Iranian oil exports, this would have a major impact on global supply.
There is also a risk of growing tensions between Saudi Arabia and Iran.
Adding to the uncertainty, European gas prices surged as much as 17% on Monday, the biggest rise since August, after Israel ordered Chevron to suspend production at the country's Tamar field amid safety concerns.
George Lagarias, chief economist at Mazars consultants, said: "With West Texas Crude near USD90 again, we are risking a third wave of inflation. This could result in prolonged inflation, rates going higher or remaining higher for even longer than anticipated and growth suffering."
A third wave of inflation would follow the post-Covid supply chain disruptions which triggered the first wave, and the war in Ukraine and ensuing energy crisis which brought the second.
Goldman Sachs has forecast that the price of Brent crude will rise to USD100 per barrel by June 2024, and this calculation does not factor in the added risk to supply from the conflict in Israel.
To trigger a third wave of inflation, oil prices would need to hit around USD95 per barrel and stay at this level for three or four months, Mr Lagarias said. This would drive up petrol prices and industrial production costs and trigger a second winter energy crisis.
A jump in oil prices will flow more quickly into the real economy than previous shocks because employees have got used to high inflation and will be quicker to ask for pay rises, Mr Lagarias warned.
He said: "The consumer is now more ready for inflation, which means that the transmission mechanisms will be much faster."
In turn, this would push central banks to raise interest rates further, Mr Lagarias warned. "My bet is that a prolonged oil crisis would move the dial towards more hikes."
Oxford Economics said that if oil prices climbed to USD95 and stayed at this level, 0.4% would be added to the global rate of inflation in 2024. This would indicate a global inflation rate of 4.6%, based on its current forecast of 4.2p%. If the oil price rose to USD110, this would take global inflation next year to 5.1%.
Ben May of Oxford Economics said: "It could sort of put upward pressure on inflation expectations and lead to core inflation being a bit stickier in the short-term and wages being a bit stickier."
Oil prices are still lower than their peak of nearly USD96 at the end of September, having fallen in recent weeks over fears of a slowdown in global demand driven by high interest rates.
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