Economists warn that a third wave of inflation could be on the way after oil price spiked in response to Hamas’s deadly attacks against Israel.
Brent crude prices rose up to 5pc Monday, hitting $89 per barrel on fears that the war would escalate tensions across the Middle East and trigger sanctions.
The announcement came at a time when Israel’s central banks was trying to stabilize the economy following the currency shekel’s fall of up to 2.7pc versus the dollar. This was a seven-year high.
The currency has recovered some of its losses since the bank announced that it would sell up $30bn in foreign currency, and maintain US dollar liquidity on markets by maintaining swap lines up to $15bn.
The dollar surged, as investors sought safe havens, sending gold to an all-time high. The dollar fell by 0.2pc, while the euro was down as much as 0.4pc.
Economists worry about the possibility of a global economic recession if the US or Saudi Arabia is further involved in the turmoil.
Israel is not a producer of oil, but concerns are raised over Iran’s role in the Hamas attack that killed 250 people on Saturday. The US could have a significant impact on the global oil supply if they tighten sanctions on Iranian exports.
Growing tensions could also occur between Saudi Arabian and Iranian.
The European gas price surged by as much as 17pc Monday, the largest increase since August. This was after Israel ordered Chevron suspend production in the Tamar field of the country due to safety concerns.
George Lagarias is the chief economist of Mazars Consultants. He said, “With West Texas Crude again near $90, we risk a third inflation wave.” This could lead to prolonged inflation and rates that are higher than expected or remain higher longer than anticipated, as well as a slowdown in growth.
The third wave of inflation will follow the disruptions in the supply chain caused by the post-Covid period, as well as the Ukraine war and the ensuing energy crises that triggered the previous two waves.
Goldman Sachs forecasts that Brent crude oil will reach $100 per barrel in June 2024. This calculation does not include the additional risk of supply due to the conflict in Israel.
Mr Lagarias stated that for a third inflation wave to occur, the oil price would have to reach $95 per barrel, and remain at this level, for three or four consecutive months. The rise in petrol prices, industrial production costs, and a second energy crisis would be the result.
Mr Lagarias warns that a rise in oil prices would flow faster into the real economy because employees are used to high inflation. They will also be more likely to demand pay increases.
He said, “Consumers are now better prepared for inflation and the transmission mechanisms will be faster.”
Lagarias said that this would in turn push central banks to increase interest rates even further. “My guess is that an extended oil crisis will push the dial to more hikes.”
Oxford Economics stated that if oil price rose to $95 per barrel and remained at this level in 2024, 0.4 percentage point would be added to global inflation rate. Based on the current forecast, this would mean a global rate of inflation of 4.6pc. If oil prices rose to $110 next year, global inflation would reach 5.1pc.
Forecasters in the UK said that a $95 price for oil would increase consumer prices by 0.2 percentage points, raising the rate to 3.4pc. Forecasters predict that if oil prices reach $110 in the UK, inflation will rise to 3.7pc.
Ben May, of Oxford Economics, said: “It might put upward pressures on inflation expectations. It could also lead to core inflation becoming a little stickier over the short term and wages getting a little stickier.”
The oil price is still below its peak of almost $96 reached at the end September. It has fallen over recent weeks due to fears that global demand will slow down because of high interest rates.
Investors turned their attention towards defence stocks, and BAE Systems, the UK’s largest riser, saw its shares increase by 4.7pc on Monday. BP and Shell, two oil majors, rose by 3.2c each and 2.9pc respectively.
IAG, the owner of British Airways, was amongst the worst performers. Its stock fell by over 6pc. BA announced that it will operate flights to Israel in the next few days, but at different departure times.
Energean was the biggest loser in Europe on Monday, losing a fifth of its market value.