Sharp increase in prices barrel Oil While the 30% inflation experienced in the last three months since the end of June has begun to disrupt the inflation-fighting path planned by governments, central banks and international organizations, the period when analysts predicted that inflation could begin is receding. cutting off interest rates This is, after all, what families with mortgages and debtor companies expect.
Recent increase in costs Oil This is behind the recent upward corrections in inflation formulated by the Bank of Spain, the European Central Bank and the Federal Reserve (more reserved in the latter case). Both ECB President Christine Lagarde and FED President. Jerome Powell, They agreed that they would pay attention to this situation. Currently, recent monetary policy announcements conditioned by rising inflation expectations have led the majority of analysts to postpone this announcement. second half of 2024 Expectation of interest rate cuts in the Eurozone.
First step: From oil to fuels
At the end of June, brent oil barrel It was trading around $72. However, in the third week of September, the price strengthened at the $94 barrier. Behind this rapid increase are the production cuts decided by OPEC + countries. 30% increase in price, this is transferred to the fuel price so these are already chained Increases for 11 consecutive weeks.
Especially the rise accumulated in July and August Rates of 11.6% on diesel and 7.4% on gasoline became the main incentive that pushed inflation from a minimum of 1.9% in June to 2.6% last month. The increase in prices increased in the first half of September, so that, according to the latest data, the average fuel price has grown by up to 16% since the beginning of summer. EU oil bulletin.
High prices until 2025
Oil tensions are not expected to ease even in the next three years.
The new economic forecasts of the Bank of Spain for the period from 2023 to 2025 (presented this Wednesday) were based on the assumption of the average price of a barrel of Brent oil. $83.8 in 2023little changed Until 2024 ($83.5) and it barely gives way $78.8 in 2025. The average price of a 2023 Brent barrel, which the Bank of Spain assumed in its new September forecasts based on quotes in futures markets, is $5.8 more expensive than in June. In case of 2024 $10.9 higher By 2025, it increased by 8.4 dollars compared to June estimates.
“Despite the expected slowdown, oil prices will increase at the end of the projection horizon (2025) 20% higher than before during the pandemic Gasoline prices will increase fourfold“This is what the Bank of Spain says in its quarterly report on the Spanish economy, presented this Wednesday.
Step two: From fuels to CPI
The increase in oil prices during the summer months was the main reason for the Bank of Spain’s increase in oil prices to 3.6 percent. Average inflation forecast for 2023 (harmonized CPI measured from HICP). This is the main reason why the inflation forecast for 2024 was increased by seven tenths (to 4.3%). The Central Bank of Spain maintains its average inflation forecast of 1.8% for 2025.
Likewise, the President of the European Central Bank (ECB) Christine Lagarde“The upward revision of the inflation forecast for this year and next mainly reflects that energy has become more expensive than expected,” he said. For his part, the Chairman of the US Federal Reserve (Fed), Jerome PowellHe stated that they will closely monitor the impact of the sustained rise in energy prices on Wednesday on rising inflation expectations among consumers.
There are concerns at central banks (Bank of Spain, ECB or Fed) Transferring high energy prices to the rest of the economy. The analysis, which the Bank of Spain is working on, aims to measure the extent to which increases in energy prices are transmitted more quickly and more completely than decreases (which are transmitted more slowly and partially) to other goods and services. It is a version of what is known as ‘.rocket effect and feather effect’, The rise in oil prices indicates the speed at which fuel reaches the service stations, while the decline in the Brent barrel represents the slowness in reaching the consumer.
Step three: From inflation to interest rates
All these worrying factors are present in monetary authorities and analysts know it. Therefore, after the European Central Bank revised its euro zone inflation forecasts upwards, analysts have now moved on to the second half of 2024. Expectation of first interest rate cut.
Moreover, both Lagarde and Governor of the Bank of SpainWhile Pablo Hernández de Cos has hinted that the latest tenth increase in interest rates to 4.5% could be the last of the cycle starting in July 2022, the ECB refuses to rule out a new step. The increase in oil prices is the main threat of this situation. So is he contraction labor market, This plays in favor of further wage increases.
to encourage inflation
After hitting the ceiling summer 2022Inflation in both Spain and the Eurozone has embarked on a determined correction path, helped above all by the moderation in energy prices. inflation in spain Increased from 10.8% in July It increased to 1.9% in June 2022, thanks to energy product prices being 25% cheaper than the previous year.
Now the situation is reversed. In August, inflation rose to 2.6%, primarily due to the impact of rising fuel prices.
The Bank of Spain predicts that energy inflation will reach 25% in March 2024, pushing the overall CPI to peak at 5% in the spring of next year. The question is to what extent such expectations will shape central banks’ monetary policy and interest rate decisions.