Are high oil prices or monetary policy tools fueling inflation?
Oil prices have made an astonishing comeback this year and the likelihood of them breaking through the $80 per barrel mark is probably not too far off, a prospect some market participants have suggested may spark economic inflation fears.
However, is the high oil price really to blame? What about other monetary policy tools, such as interest rates and quantitative easing (QE)?
In theory, an oil price increase is likely to lead to inflation, forcing economic growth to level out, impacting on costs and, consequently, on the price of goods and services dependent on petroleum-refined products.
Yet a significant question remains: Are the current oil price levels high enough to raise economic inflation concerns?
First of all, inflation started to jump up even when oil prices were at lower levels. For instance, in May, inflation in the US reached 5 percent year-on-year, the highest increase in nearly 13 years. In addition, commodity prices in America are steadily edging up, raising the specter of economic inflation as the country seeks to recover from the coronavirus disease (COVID-19) pandemic. At the same time, China also recorded production price increases in April, the highest in almost four years.
All this has increased fears that the current wave of inflation, which is expected to grow, will destabilize the global economy causing possible deeper financial crises and repercussions that may hinder recovery as the world continues to grapple with COVID-19.
Amid the economic recovery, and increased demand for commodities, raw materials, and services, inflation is rising worldwide to the point that some analysts believe it could trigger another global economic crisis. Despite the gloomy predictions, most economists consider the situation to be a temporary one; but for how long?
The current high oil prices could be viewed as evidence of the success of the COVID-19 vaccination program, opening the doors of businesses, resuming travel, spending, and work, in light of low interest rates and unprecedented monetary stimulus.
However, it is not only oil prices that are moving up; raw materials, goods, services, and commodities are all becoming more expensive, contributing to the upward inflation curve. Last but least, inflation is not about high demand for products and less supplies, it is also about monetary policy tools, including QE by increasing money supply.
Moreover, inflation could be managed via the most essential tool, which is interest rates controlled by central banks, led by the US Federal Reserve. There was, and still is, increasing demand for a clear decision in this regard.
Still, the central banks unanimously agreed to keep interest rates as they are, knowing that they have repercussions on the global economy.