As the world grapples with rising inflation, a new economic challenge is on the horizon – surging global crude oil prices. This is likely to fuel the inflationary fire, particularly in emerging economies already facing higher commodity prices and slower growth due to the COVID-19 pandemic. In addition, if the oil price rises persist, it could lead to capital flow outflows and depreciation of local currencies in developing countries, boosting the inflationary pressure on tradable goods prices, labor markets, and broader economic activity.
According to the International Energy Agency, oil prices are climbing on the back of supply concerns, with OECD crude inventories falling at their fastest pace since August 2020. OPEC+ member countries are cutting production to support prices and reduce the risk of surplus supplies hitting the market.
This comes as the global economy recovers from the coronavirus pandemic, leading to higher demand for energy and food commodities. This, in turn, has contributed to a sharp pick-up in underlying inflation across most major developed and emerging markets. Inflation is a significant issue for many governments. It is squeezing consumers and tightening their budgets in industrialized economies while pushing up poverty and suffering in poorer countries where food and fuel costs are increasing.
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Inflation is also making the monetary policy landscape more challenging, with central banks raising interest rates in a degree of synchronicity that has not been seen for decades. Combined with a faster-than-expected US federal funds rate hike, this adds to the inflationary pressure on global financing conditions and could generate adverse spillovers.
While rising inflation is a significant concern, there are reasons to be cautiously optimistic about the world economy. The underlying fundamentals remain strong and, in some cases, improving, which may be enough to keep inflationary pressures under control.
Why it is a headache for India
In India, the surge in crude oil prices will translate to an increase in domestic petrol and diesel prices, which could impact a large population. In addition, the government may also face the prospect of having to lower excise taxes on petroleum products to ease the burden on consumers. This may have a significant fiscal impact on the government. The higher fuel prices are likely to hurt consumer spending in the country, which is already constrained by slowing GDP growth. This, in turn, will stall economic recovery and compound the inflationary pressure on the economy. Unless the government takes steps to lower the price of petroleum products, it will be difficult for the country to contain inflation. This story was initially posted on Advisor Channel, a visual news source for advisors and their clients.