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A multitude of factors has helped push the oil price higher and the rise is set to continue in the coming months, but prices will probably fall again towards the end of the year, according to Jan von Gerich, Analyst at Nordea Markets.

Key Quotes

“The further rise in prices seen since then does not change the growth outlook materially. While oil exporters and importers will naturally be impacted differently, the sensitivities of most economies to oil prices have fallen. What is more, the negative impact for the global economy stemming for higher prices has moderated, as oil producers increasingly spend their additional oil revenue instead of saving it.”

“There will naturally be a clear impact on headline inflation, but this should not be overplayed either. In the Euro area, assuming a USD 80 per barrel oil price and the current FX rate, the positive impact from energy inflation would increase headline inflation by a further 0.2 percentage points by June, and ease thereafter.”

“There should not be any big impact on central bank policies either. In the Euro area, the focus is clearly on core inflation, and higher energy prices do not change that picture. The ECB has made it clear that it needs to see a sustained upward trend in core inflation before it is ready to change the monetary policy setup. Higher headline inflation is not sufficient, as was illustrated as recently as last year, when headline inflation touched 2%.”

“In the US, the Fed has usually looked through energy-induced spikes in headline inflation and concentrated more on the possible drag on growth. This time the Fed has put more emphasis on the symmetric nature of its inflation target, which implies it is prepared to let inflation run at least modestly above the 2% target. Temporary swings in headline inflation should not be any problem for the Fed. This was illustrated e.g. in 2008, when a jump in headline CPI to above 5% did not stop the Fed’s rate cutting cycle.”