Analysis: As inflation breaks records, $100 oil is also looming

A GOI company truck is seen next to fuel pumps at a Cepsa petrol station in Cuevas del Becerro, Spain, November 29, 2021. REUTERS/Jon Nazca/File Photo

LONDON, Jan 19 (Reuters) – Already less transitory than forecast, central bankers’ inflation headache may be about to become more acute as they face the prospect of $100-plus oil that lifts consumers’ price expectations and intensifies simmering wage hike pressures.

Brent crude futures, which soared 50% in 2021, are up a further 14% already in 2022 at seven-year highs of $89 a barrel . With production capacity tight, inventories low and geopolitics racking several producing regions, oil is hurtling towards $100, a level Goldman Sachs predicts will be breached by mid-year. read more

JPMorgan predicts oil could reach $125 a barrel this year and $150 in 2023.

It is possible the net impact of a $12 price rise from here would not be massive, as headline inflation rates already reflect jumps in energy prices from a year ago. Economies, especially in the West, are meanwhile far less energy intensive than even a decade ago.

Rate hikes in countries including Britain and Norway, and hints from central banks such as the U.S. Federal Reserve, which may signal next week how fast it plans to tighten policy, have checked inflation expectations from tracking oil prices higher.

But policymakers had reckoned on base effects kicking in as the 2021 oil surge abated, tempering year-on-year inflation.

Many also argue the psychological impact of $100 oil cannot be understated, especially as consumers, businesses and politicians fret over inflation at multi-decade or record highs; the latest U.S. consumer price reading was 7%, a 40 year-peak. read more

Wednesday’s data showing British consumer inflation at 30-year highs underscores how the energy effect is cascading into food and hospitality prices.

“It could be the cherry on the inflation cake if we don’t get a moderation in energy prices,” said Frederik Ducrozet, a strategist at Pictet Wealth Management.

“This time it’s a bit different because we’re already at a point where the risks are tilted up and central banks are worried about a wage-price spiral since energy prices contribute to second-round effects.”

Citi’s inflation surprise indexes have hit record or multi-year peaks in Europe and elsewhere, indicating readings have come in higher than expected. (.CSIIUSD), (.CSIIEUR)

OIL MATTERS

If oil does hit $100 and stays there, it will throw into disarray policymakers’ calculations — European Central Bank projections for example assume Brent at $77.5 in 2022, declining to $69.4 by 2024.

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

The effects differ from country to country but in the euro area, a 10% rise in oil adds roughly 0.5%…