Analysis: Inflation breaks records as US$100 oil scenario approaches

Already less transitory than anticipated, central bank officials’ inflation headache may be about to become more acute as they face the prospect of more than $100 a barrel of oil. , which would raise consumer price expectations and intensify wage pressures.

Brent oil futures, which soared 50% in 2021, are up another 14% in 2022, at seven-year highs around US$89 (R$489) per barrel.

With production capacity tight, inventories low and geopolitical issues affecting several producing regions, oil is targeting $100 a barrel, a level that will be surpassed by mid-year, according to forecasts from Goldman Sachs.

JPMorgan projects that the commodity could reach US$ 125 (R$ 687) a barrel this year and US$ 150 (R$ 825) in 2023.

It is possible that the net impact of a $12 price increase from here will not be huge, as inflation rates already reflect the jumps in energy prices from a year ago. Economies, especially in the West, are far less energy intensive than they were even a decade ago.

Rate hikes in countries like the UK and Norway and clues from central banks like the US Federal Reserve, which could signal next week how quickly it plans to tighten monetary policy, have dampened inflation expectations from rising. accompany the rise in oil prices.

But policymakers were counting on base effects to start to show, as the 2021 oil surge subsided — and so annual inflation could moderate.

Many also argue that the psychological impact of $100 oil cannot be underestimated, especially as consumers, businesses and the political class worry about inflation at multi-decade highs or record highs. The latest annual US consumer price reading hit 7%, a 40-year high.

Data on Wednesday that British consumer inflation hit 30-year highs highlighted how the effect of rising energy costs has spilled over into food prices and the hospitality sector.

“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 little different, because we’re already at a point where risks are upside down and central banks are worried about a wage price spiral as energy prices contribute to second-round effects.”

Citi Bank’s inflation surprise indexes hit record or multi-year highs in Europe and elsewhere, an indication that price readings have been higher than expected.

OIL MATTERS

If oil reaches US$ 100 and stays there, it will disrupt the calculations of monetary policy makers — the ECB (European Central Bank) projections, for example, assume Brent at US$ 77.5 (R$ 426) in 2022 , with a drop to US$ 69.4 (R$ 381.5) by 2024.

Fundamentally, it could also induce companies to pass on costs to consumers or workers to demand higher wages. These so-called second-round effects can cause a broader inflationary spiral that puts pressure on central banks to act.

The effects differ from country to country, but in the eurozone, a 10% rise in oil adds about 0.5 percentage point to inflation, although the direct effects tend to fade quickly.

For the United States, an article published in November on the CESifo research network by two Dallas Fed researchers estimated that a $100 oil scenario would increase the annual PCE index reading by 1.8 percentage points by the end of 2021 and by 0.4 point at the end of 2022.

The core PCE, the Fed’s preferred measure of inflation, would rise 0.4 percentage points and 0.3 percentage points in 2021 and 2022, respectively. That would raise households’ one-year inflation expectations by 1.2 percentage points, but raise five-year expected inflation by just 0.2 percentage points, the study showed.

For some, the second-round effects are already here, with the US economy close to full employment and average hourly wages up a solid 0.6% in December. The UK, where job creation has hit record highs, is considering raising the minimum wage to ease the pain of fuel bills.