Oil prices continues to increase inflation

ONE of the main uncertainties that have unsettled financial markets recently has been the extent of inflationary pressures in the major economies and the likely response of central bankers to these pressures.

Headline inflation has been pushed higher, in no small part due to rising oil prices. During the run-up in oil prices in the first three quarters of last year, central bankers were relatively relaxed about their second-round inflationary effects. Concerns, particularly in the eurozone, centred more on the depressing impact these higher oil prices could have on the economy. Central bankers are fretting about the possibility that the increase in headline inflation will pass through to the core rate and that building inflationary pressures need to be suppressed.

Crude oil prices have only dropped back slightly from their peak of close to $75/barrel in early May. However, at close to $70/barrel, they are still up over 15% from their start-year levels. So, are the central bankers right to be concerned? Has oil moved to a new level or is the latest increase a temporary phenomenon?