Global Economic Weekly: Is oil volatility inflationary?

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Global Economic Weekly: Is oil volatility inflationary?

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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

management for monetary policy may advocate otherwise. Euro area 7

UK 9

Asia 13United States: Twist in the tale

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.

Claudio IrigoyenEuro Area: ECB review – yes, see you in September Global Economist

The ECB kept its calm. Policy rates were kept on hold, communication was fairly neutral. BofAS