Oil shock splits forecasts as inflation outlook grows uncertain

Tuesday 14 - 17:20

By: Dakir Madiha

Oil shock splits forecasts as inflation outlook grows uncertain

Rising oil prices linked to tensions in the Strait of Hormuz are driving a sharp divide among leading economic forecasters over the outlook for global inflation. With crude holding above 100 dollars per barrel, Oxford Economics and Royal Bank of Canada present contrasting scenarios, underscoring uncertainty about the scale and duration of the shock.

Oxford Economics outlines a severe scenario in which oil prices exceed 150 dollars per barrel and remain elevated for several months. Under this model, global inflation would rise to 7.7 percent, approaching levels seen in 2022, while global GDP growth would slow to around 1.4 percent in 2026. The firm warns that advanced economies including the euro area, the United Kingdom, and Japan could face outright contractions. It also highlights risks beyond headline oil prices, including shortages of diesel, jet fuel, and marine fuels that could further disrupt economic activity.

In contrast, economists at the Royal Bank of Canada take a more moderate view. Senior economist Claire Fan argues that the current environment differs from previous inflation shocks. She points to stronger global supply chains, softer domestic demand, and the concentration of price pressure in energy markets. RBC expects Canadian headline inflation to rise to around 3 percent in the second quarter from 2.2 percent in the first, but sees limited spillover into core inflation. The bank cites past research indicating that even sustained increases in oil prices have only modest long term effects on underlying inflation.

The divergence reflects differing assumptions about how quickly energy shocks spread through the broader economy. Oxford Economics warns that prolonged disruptions could trigger broader price pressures and weaken growth significantly. RBC, however, expects the impact to remain contained unless high oil prices persist beyond the near term.

At the center of both outlooks is the Strait of Hormuz, a critical chokepoint for global oil supply. Recent tensions involving the United States and Iran have raised concerns about potential supply disruptions, with some estimates suggesting a sharp widening of the global oil deficit. The US Energy Information Administration has warned that restoring normal oil flows could take months even after hostilities ease, reinforcing the importance of duration in shaping the inflation outlook.