Oil: Could higher prices flick the switch? – ANZ

Research Team at ANZ, suggests that at around USD50 a barrel, oil is pretty cheap but in change terms, however, the increase has been dramatic.

Key Quotes

“Due to supply disruptions and other factors, oil futures have risen for four straight months to be around 85% higher than February lows. A near-doubling of oil prices would normally cause conniptions, but markets seem to be taking it pretty well so far. After all, higher oil prices makes deflation less likely, and a higher nominal base for the global economy would be helpful.

But if inflation were to start to move, and inflation expectations were to start to move up significantly, then hard choices would loom. Oil shocks are always tricky for monetary policy – they necessitate choosing whether to stabilise growth or inflation; policymakers can no longer hope to do both. But the stakes are now unusually high.

In countries that have effectively printed a great deal of money, a standard MV=PY macroeconomic accounting suggests a risk of a dramatic inflation turn, as all that M suddenly comes into play. It’s not a risk many are talking about at this juncture, not surprisingly, but the tail risks are sometimes the most interesting ones.”