Oil: War-driven price effects and inflation – UBS

UBS economist Paul Donovan discusses how the Gulf war has lifted Oil prices and pushed consumer price inflation above target in major economies. He notes that Energy has a relatively small direct weight in US and EU consumer baskets, but its indirect impact via transport and production is significant. Donovan highlights the complexity of isolating war-related price effects from overall inflation.

War impact on global oil inflation

"The Gulf war has pushed up oil prices and increased consumer price inflation around the world—but by how much?"

"“Energy” (including non-oil energy) is just over 7% of the US consumer price basket. In the EU, it is almost 11%. Core inflation “excluding food and energy” does not exclude all the effects of energy (or, indeed, food). Energy is embedded in things like airfares and delivery costs."

"Measuring an economy’s oil consumption also does not help. If a good is manufactured in China and sold in Europe, Europe is effectively importing the oil used in the manufacturing and transport processes—over and above direct domestic oil consumption."

"Just focusing on crude oil prices misses the rise of refined oil prices, as Gulf refining capacity has been damaged. Since February, the crude oil futures price has risen 26%, but US diesel prices are almost 50% higher. China’s vehicle energy prices are up only 5%, meaning that the oil cost embedded in US imports from China are likely less than the oil costs embedded in US production."

"Stripping away the price of war from consumer inflation is therefore very complex. However, for major economies, the price consequences of the war are the dominant reason inflation is currently above target."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)