Standard Chartered analysts Madhur Jha and Ethan Lester argue that sustained Oil price shocks have historically driven global inflation and often preceded global recessions. They highlight that a Brent move toward USD 135/bbl could shift market focus from inflation to growth risks. The authors stress that tighter central bank reactions to Oil shocks now add to downside growth concerns.

Oil shocks, inflation and growth risks

"Stagflation concerns following an oil shock have some basis in historical evidence. Since the 1970s, global inflation has been driven primarily by oil shocks (which have accounted for c.40% of global inflation variation, according to the World Bank’s analysis), with global inflation’s sensitivity to oil shocks on the rise since the pandemic."

"Moreover, since the 1950s, the global economy has witnessed five periods of recession (defined as a contraction in global real GDP per capita). Four of these recessions were preceded by a sharp rise in oil prices (barring the 2020 recession caused by the pandemic). While we do not see a particular oil price level associated with a recession, all previous recessions saw sharp oil price increases – at least a doubling."

"By our estimate, a move to USD 135/bbl for Brent oil price would be a level at which markets start to focus more on growth than inflation risks."

"While markets are right to worry about inflation risks currently, we are concerned about a pronounced growth impact given already-heightened global macro uncertainty and rising risks of asset market corrections related to private credit risks and AI valuations."

"Over the past two decades, central bank responses have moved from ‘looking through’ oil shocks to more proactive policies to keep inflation in check. This adds to downside growth risks. A shift in concerns to growth over inflation could focus attention on which economies have fiscal and monetary space to counter a slowdown."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)