Russia’s move to effectively invade Ukraine has sent both global oil prices and European gas prices surging again, raising the spectre of high inflation that could put the brakes on economic recovery.

Oil rather predictably broke past the US$100 per barrel mark with the benchmark Brent price last trading at US$105.29/bbl.

These high prices – along with concerns about depriving Europe of both oil and gas from its biggest supplier – have resulted in the US noting that it would not place sanctions on Russian supplies of the two fossil fuels.

Despite this, most analysts believe that it is only a matter of time before crude breaks past the triple digit ceiling though there are some who believe that an Iranian nuclear deal and a resolution to the conflict could send prices plummeting – possibly below the US$90/bbl mark.


European gas price spike limited … so far

Meanwhile, European gas prices have climbed about 15% from a week ago due to the tensions as well as Germany’s decision to halt certification of the Nord Stream 2 pipeline.

This presents some real risks to Europe’s ability to rebuild its depleted gas stockpiles as Russia has made opening Nord Stream 2 a prerequisite for the normalisation of gas deliveries to Europe.

So far this has had little impact on inflation with Oxford Economics calculating that even a 20% increase in prices over its baseline would only life inflation by 0.2 percentage points above its 2022 baseline and drag GDP down 0.1% below its 2023 baseline.

However, it warned that with gas prices likely to remain higher for longer, the odds of greater passthrough to consumers were also rising fast.

This could result in shrinking margins for gas-reliant industrial producers, which could in turn result in more production interruptions.

“Higher inflation will make growth prospects even more reliant on consumers normalising their still-high savings rates and spending some of the excess savings they accumulated during the pandemic,” the economic consultancy noted.

However, escalating tensions and higher prices are expected to dampen consumers’ inclination while passthrough of higher spot prices are likely to be higher than last year’s comparatively muted response.

Oxford Economics concluded that its previously optimistic view of the eurozone’s economic outlook this year is increasingly being undermined.

“While we would expect some offsetting measures by fiscal policymakers, we think there are now growing risks to this year’s two growth pillars – a rebound in private consumption as spending normalises, and a pick-up in industrial activity as supply bottlenecks fade,” it added.

“This puts the ECB in a bind given that it has just taken a hawkish turn. But we think that higher inflation amid larger downside risks to the growth outlook are more likely than not to delay any potential rate hike this year.”