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Oil Shock: Will Inflation Spike Again?
30 Mar
Summary
- Companies may pass on higher costs due to supply shocks.
- Growth is subdued, and labor markets are softer now.
- Bond markets indicate a view of inflation over growth.
The current geopolitical tensions, particularly the heightened grip on the Strait of Hormuz, are prompting questions about whether companies will pass on increased costs stemming from the latest dramatic supply shock. This situation echoes debates from the Covid-19 pandemic, where some argued that firms used the crisis to increase prices.
However, experts suggest the current oil price shock may have a narrower scope than previously experienced. While certain costs, like airfares due to surging jet fuel, are expected to rise, widespread secondary inflation effects would require prolonged Strait of Hormuz closures. Furthermore, subdued global growth and softer labor markets, unlike during previous crises, may limit companies' ability to aggressively pass on costs.
Bond market indicators are currently signaling that financial markets perceive the rise in oil prices as more indicative of inflation than of economic growth. Should oil prices continue to climb, market sentiment might shift, potentially leading to lower inflation expectations over the longer term.
