Is oil volatility inflationary

Global Economic Weekly Is oil volatility inflationary?

Global Letter: Is oil volatility inflationary? 24 July 2026

Volatility in oil prices is more related to impaired traffic of oil rather than the instability Economics of the Middle East in itself. The indirect impact of volatility in oil prices and the Global asymmetric response to prices add to the stickiness in core components of any inflation metrics. Should central banks respond to oil price shocks? The textbook policy response Table of Contents is to look through supply shocks, waiting for the temporary increase in inflation to Global Letter 2 dissipate. However, after five years of above-target inflation, and supply shocks that are US 4 becoming more frequent and persistent amid rising geopolitical tensions, sound risk Euro area 7 management for monetary policy may advocate otherwise. UK 9

United States: Twist in the tale Asia 13

Our base case is that the Fed will stay on hold at 3.5-3.75% in July. But the spike in oil Emerging EMEA 15

prices has made it a close call. With markets now pricing nearly 10bp of hikes in July, Latin America 17 Chair Warsh faces a difficult choice. Not hiking could challenge the Fed’s credibility on Key forecasts 19 inflation. But raising rates would go against his framework of looking through supply Detailed forecasts 20 shocks. We think July is Warsh’s call as he has enough votes either way. He has strategic Research Analysts 26 incentives to hike soon. We still expect three 25bp hikes, in Sep, Oct & Dec.

Euro Area: ECB review – yes, see you in September Claudio Irigoyen Global Economist The ECB kept its calm. Policy rates were kept on hold, communication was fairly neutral. BofAS We still expect a second hike in Sep, though risks of a third one are up again. Our bigger conviction remains that 2027 cuts will follow to bring policy rates back to, or below, 2%. Antonio Gabriel Global Economist UK: BoE preview – On hold, on watch BofAS We expect BoE on hold (7-2, high risks of 6-3). Balanced tone with door open to a hike, but not a strong signal on an imminent hike. Risks are tilted to a hawkish tone given Global Economics Team recent escalation. We expect the BoE on hold this year, but the risk of a hike is rising. BofAS See Team Page for List of Analysts Asia: India – RBI navigates a three-circuit policy path As things stand, the immediacy of policy imperatives have declined for the Reserve Bank of India, but the fog of economic ambiguity stays intact at a distance. The RBI still needs to navigate new headwinds, to ensure there is no policy slippage or error.

Emerging EMEA: Kazakhstan – highly energized issues Muted impact of export disruptions likely reflects expected quick resolution. It is likely given scale of potential impact. $5bn fine can cover bulk of FX shortfalls. NBK to stay on hold in Jul but remains well on track to cut up to 300bp this year.

Latin America: Brazil – elections are coming Brazil’s 2026 election cycle is underway, with party conventions beginning July 20 and candidate registration due by August 15. Fiscal policy is the central economic issue, as rising public debt requires significant adjustment, but fiscal consolidation is challenging.

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Global Letter Claudio Irigoyen Antonio Gabriel Global Economist Global Economist BofAS BofAS

Is oil volatility inflationary? At the risk of sounding like a broken record, we have been on the camp of expecting persistent oil volatility as we interpreted the Iran deal as very fragile in nature given the incentives of the main parties involved. Brent above $100 per barrel goes in line with our core view on Middle East conflict and a credible and sustainable reopening of the Strait of Hormuz. Equally important is the lack of two-way fluid transit through the Bab el- Mandeb strait. In other words, volatility in oil prices is…