If oil prices rise to $150 a barrel, inflation around the world will surge and global growth will be dented, according to Barclays Capital analysts.Emerging markets countries are more susceptible to oil price driven inflation, according to Barclays research. That’s likely because the weight of energy costs is higher within those economy’s inflation baskets than in developed markets.
In developed markets, a spike in oil prices to $150 a barrel would see inflation rise to 3%. The danger is that the immediate spike in prices would force central banks to act and raise rate to tame price increases. There’s no guarantee rate hikes would be effective, however. The ECB has already begun this process.
The rise in inflation would have a direct and immediate effect on the consumption habits of individuals around the world, according to Barclays.One of the main ways an oil supply shock can hurt growth is via the effect of gasoline/energy prices on consumption. Oil price rises spur inflation, reducing real disposable income (and, thus, households’ purchasing power), leading to a contraction in real consumer spending. As consumption generally accounts for 60% of GDP, the overall effect is large. Oil exporters would also benefit from an offsetting wealth effect associated with the windfall of revenues.
Note the steep drop off in global growth in the event of prices rising to $150 a barrel. The impact appears to wane by March of 2012 in each case.