Oil prices are now $10 higher than a month ago, raising fears that everything from petrol to food could become more expensive for consumers and even affect the pace of interest rate cuts.
Lale Akoner, global market analyst at investment group eToro, said: “Cost shocks like rising oil prices can contribute to inflation persistence.”
Oil prices began to rise at the end of last week as hostilities escalated in the Middle East. The biggest focus is on the Strait of Hormuz, which carries around a fifth of global oil supplies.
Susannah Streeter, head of money and markets at DIY investment group Hargreaves Lansdown, said prices could rise further.
She said: “Although gas prices have also edged up slightly, the biggest moves have been seen with crude prices, which are up around 12% since hostilities erupted and could head higher if the Strait is targeted.
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‘’With the Israel-Iran conflict intensifying, there’s wariness at the start of the week as dangerous geopolitics stay front of mind. However, [there is] stronger data from China, indicating growing consumer confidence is helping to provide some optimism.”
Oil price rises cause inflation
The rising price of oil affects the cost of many other goods because oil is used in manufacturing and also directly affects the cost of the fuel to transport goods from one place to another. We saw this happen when oil prices rose at the beginning of the Ukraine war.
It can also increase the cost of travel, as airline fuel becomes more expensive – meaning we will pay more for holidays – and could have an effect on energy bills. Gas and electricity bills are subject to caps based on wholesale prices.
The next price cap will be announced on 27 August, based on wholesale prices at that point, and will affect the cost of energy this winter – between October and December.
Increasing inflation will provide a further headache for Bank of England policy makers, as it makes it harder to cut interest rates.
“Central banks may respond by delaying rate cuts, but a full policy reversal is unlikely unless oil prices remain elevated for an extended period or inflation expectations become unanchored,” Akoner said.
However, he added that “for now, policymakers are expected to look through the volatility”.
