Oil: War-driven price effects and inflation – UBS

UBS economist Paul Donovan explains that the Gulf war has caused oil prices to rise, leading to consumer price inflation exceeding targets in major economies. He emphasizes that while energy has a relatively small direct impact on US and EU consumer baskets, its indirect effects through transportation and production are substantial.

Donovan also notes the challenge in distinguishing the specific impact of war-related price increases from overall inflation. Energy contributes around 7% of the US consumer price basket, while it accounts for nearly 11% in the EU. The full impact of energy inflation is further complicated by its presence in various factors such as airfares and delivery costs.

Additionally, measuring a country's oil consumption is insufficient, as the oil used in manufacturing and transportation to Europe is effectively imported, even if it originates from China. Since February, crude oil futures prices have increased by 26%, whereas US diesel prices have surged almost 50%. China's vehicle energy prices have only risen by 5%.

Therefore, isolating the effects of war-induced oil price increases from overall inflation proves to be a complex task. However, it is evident that the price consequences of the war are primarily responsible for inflation being above target in major economies.