Oil price risks put inflation back in focus

Sun Jun 22, 2014 5:44am EDT
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By Robin Emmott

BRUSSELS (Reuters) - Iraq will be foremost in investors' minds in the coming week as oil price risk has returned to markets, complicating the task for central banks whose policies are beginning to diverge for the first time since the global financial crisis.

Oil prices neared nine-month highs late last week, touching $115 a barrel, and the rapid advance of militants in Iraq, the second-largest OPEC producer, is destabilising oil markets.

That has implications for inflation in the United States and Europe, as well as Asia's export-oriented economies that are large net importers of oil.

Investors will be watching a range of data, from German and Japanese consumer prices to first-quarter U.S. GDP, to see how the Federal Reserve, the European Central Bank (ECB), the Bank of England and the Bank of Japan respond.

"Just as oil prices had become increasingly stable, we reckon the risk for an oil price spike is now the highest since the global crisis," said Christian Keller, an economist at Barclays. "We think a further price spike of 10 to 15 percent from here is not implausible," he said.

Until now, falling energy prices have partly been responsible for the euro zone's low level of consumer price inflation, which the ECB considers to be in its "danger zone".

A rise in the inflation rate would be welcome but economists and the International Monetary Fund believe the ECB still needs to consider U.S.-style money printing to support the bloc.

Euro zone sentiment readings and preliminary purchasing managers' surveys for June on Monday may give the ECB a sense of how much more help the euro zone economy needs. The recovery from a two-year recession lost pace in April and manufacturing has lost momentum.   Continued...

Farmers carry barrels at a fuel station during a diesel shortage in Sanaa January 8, 2014.   REUTERS/Mohamed al-Sayaghi