Surging oil prices pose a risk to inflation projections

The pressure of high inflation is being felt by almost all countries in the world, especially in advanced economies. Despite all the measures taken and steps being taken, the desired levels of inflation are not being achieved. Of course, one of the main factors contributing to this situation is energy prices. The energy crisis caused by the Russia-Ukraine war, which started immediately after the pandemic, made things even more difficult. The significant decline in oil and natural gas prices that followed provided some relief. However, the recent decision taken by OPEC+ countries has raised concerns again.

As I mentioned in my previous column, but I'll remind you again, this week, 13-member OPEC led by Saudi Arabia and 10 countries led by Russia, which is a significant player in the market despite not being an OPEC member, made a critical decision. Energy and oil ministers of OPEC+ countries agreed to cut an additional 1.6 million barrels per day of oil supply starting from May. I say additional because there is already a 2 million barrel cut in place. Therefore, the total cut amount was increased to 3.6 million barrels from May onwards.

We quickly saw the first impact of the decision on the price of crude oil futures. Crude oil prices, which have been hovering around $70-75 per barrel for some time, rapidly rose to $85 per barrel. However, according to some market analysts, it is likely that the prices will continue to increase even further.

The rise in energy and, specifically, oil prices is a nightmare for central banks. We are going through a period where the pass-through effect of the rise in oil prices on inflation is quite high. Oil prices, which were around $70 for a while, provided central banks with a partially comfortable breathing space and opened up limited room to fight against inflation. However, the possibility of oil prices returning to levels of $90-100 will upset the plans of central banks. For instance, the Federal Reserve, which is struggling with high inflation on the one hand and a banking crisis on the other hand, now faces another serious problem with the start of the rise in oil prices.

This situation will have a powerful impact that will disrupt the data that central banks constantly refer to in their message of "we will decide based on the data every month." Therefore, let me note that we will see more messages of "uncertainty" in both central bank texts and speeches by their presidents in the coming period.