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While inflation has fallen sharply since 2022 due to central bank actions, geopolitical events in the Middle East have once again stoked fears of a new wave of inflation.
In every new phase of geopolitical conflict, pessimists expect oil prices to rise to $200, with a direct impact on inflation rates. But reality is more complicated than that, and it’s important to remember that inflation is not simply equal to the price of oil and gas combined.
However, the factor that may work against us is time. If oil and natural gas prices remain above key technical levels for a period of time (weeks to months), we may actually see a rebound in headline inflation, even if other components (such as the housing sector) remain supportive of a slowdown in inflation.
Key fundamental and technical factors to remember:
• The red technical alert level for oil prices is $80, as oil’s contribution to inflation turns clearly positive in 2026 above that level.
• The second technical level to watch is $93/95, above which could lead to an inflationary shock similar to what happened at the start of the war in Ukraine.
• For European natural gas, the technical warning level is 150.
• The direct and indirect impact of oil and gas prices on inflation in Europe and the United States accounts for approximately 15% of the total inflation component.
The table below shows the direct and indirect effects of oil and gas prices on calculated inflation rates in the United States and Europe:
At this stage, we are still far away from the sharp increase in energy prices that will occur when the war in Ukraine breaks out on February 24, 2022. These figures do not indicate systemic risk, as the Strait of Hormuz accounts for 15% of global oil supplies (40% for China) and 5% of global natural gas supplies (20% of global LNG trade).
In fact, time will be the deciding factor. If oil prices and European natural gas prices remain above the technical warning levels for more than two to three months, inflation could rise by about 0.5 to 1 percentage point, well above the Fed’s target and limit the possibility of resuming federal funds rate cuts this year.
In this scenario, rising inflation would delay monetary easing, but we are still a long way from an inflationary shock caused by the fallout from the health crisis in 2021.
The chart below shows the Japanese weekly candlesticks for U.S. crude oil:
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