Economists Issue Warning of Impending 3rd Inflation Wave Amid Surging Oil Prices

October 10, 2023
Stephanie Bedard-Chateauneuf
Economists are sounding the alarm as a surge in oil prices driven by Hamas's attack on Israel raises concerns of a third wave of inflation, with potential global repercussions and increased tensions in the Middle East.

Economists are sounding the alarm about the looming threat of a third wave of inflation, driven by a sudden surge in oil prices following a deadly attack by Hamas on Israel.

The price of Brent crude oil once again witnessed a significant spike on Monday, reaching $89 per barrel at its peak. Concerns are mounting that the ongoing conflict in the Middle East could further escalate tensions, potentially leading to sanctions and disruptions in oil supply.

Furthermore, European gas prices experienced a sharp increase, soaring by as much as 17% on a single day when Israel ordered Chevron to halt production at the Tamar field due to safety concerns.

These fluctuations in energy prices had a ripple effect on the London Stock Exchange, where shares in major energy companies like bp and Shell rose by nearly 3%.

Economists are also expressing deep concerns about the possibility of a global recession if the United States and Saudi Arabia become more deeply entangled in the turmoil.

It's worth noting that Israel itself is not a significant oil producer, but there are apprehensions surrounding Iran's involvement in Hamas's unexpected attack on Saturday, resulting in a tragic loss of 250 lives. A potential tightening of US sanctions on Iranian oil exports could profoundly impact global oil supply.

There is also a growing apprehension of heightened tensions between Saudi Arabia and Iran, as reported by the Telegraph.

This looming third wave of inflation would follow the first wave triggered by post-Covid supply chain disruptions and the second caused by the war in Ukraine, subsequently leading to an energy crisis.

Oxford Economics has provided projections, indicating that if oil prices were to climb to $95 per barrel and remain at that level, it could result in an additional 0.4 percentage points added to the global inflation rate in 2024, pushing it to 4.6%. This forecast is based on their current estimate of 4.2%. If oil prices were to surge to $110 per barrel, global inflation in the coming year could reach 5.1%.

In the United Kingdom, a $95 oil price would add 0.2 percentage points to consumer prices, potentially increasing the rate to 3.4%. Should oil prices rise to $110, the UK's inflation rate is forecasted to reach 3.7%.

George Lagarias, chief economist at Mazars consultants, added, "With crude near $90 again, we are risking a third wave of inflation. This could result in prolonged inflation, rates going higher or remaining higher for even longer than anticipated and growth suffering."