In early February, the Reserve Bank of Australia became the first major central bank to reverse course, raising rates by 25 basis points to 3.85% as inflation picked up sharply in the second half of the year, climbing from 2.1% year-on-year to 3.8%, above the RBA’s 2–3% target range.
Now that oil prices have surpassed $100 per barrel, other central banks could follow with similar moves.
Starting with the US, oil has already risen from $55 to $80 per barrel, an increase of $25, implying approximately 50 basis points of additional inflationary pressure. According to analysis by The Kobeissi Letter, that alone could push the CPI from around 2.4% to approximately 2.9%.
With oil at around $95 per barrel, inflation could approach 3.2%, while levels close to $110 would imply something closer to 3.5%. In a more extreme scenario, oil at $130 could push inflation to 3.9%, and prices near $150 could raise it to around 4.3%, assuming the same relationship holds.
Even if the Fed doesn’t raise rates again, it will likely delay cutting them — and recent moves in the S&P 500, Nasdaq, and Russell 2000 suggest markets are already starting to anticipate that.
As for Europe, unlike the U.S., the region has fewer energy reserves and isn’t a major energy exporter, so the impact could be stronger. Add to that the fact that inflation in the eurozone had already started accelerating — February data showed headline inflation at 0.4% month-over-month (seasonally adjusted) and 1.9% year-over-year, while core came in at 0.4% m/m and 2.4% y/y — and it’s clear why European equity markets have been noticeably weaker.
In China’s case, the country has built massive strategic oil reserves. Even if imports were completely cut off, it could likely rely on its reserves for several months. It also has alternative supply routes and partners, including Russia. For natural gas, China could sustain itself for just over a month using reserves alone, again with alternative suppliers.
The problem is that if a military conflict drags on, persistently high oil and gas prices could slow the global economy, which in turn would reduce demand for Chinese exports, still one of the main drivers of the country’s GDP growth.
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