Oil, war and the limits of monetary policy
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The current conflict involving the US, Israel, and Iran is causing a macroeconomic shock, with oil prices rising sharply due to supply disruptions. Central banks are facing a challenge in responding to this supply-led inflation, which is outside the reach of conventional monetary tools.
A conflict between the US, Israel, and Iran is affecting global oil supply. The Strait of Hormuz, a key oil route, is at risk of disruption. Oil prices have risen to $95-$115 per barrel. Freight and insurance costs have surged. Central banks are facing a challenge in responding to this supply-led inflation. The US has seen a rise in headline inflation, while Europe's forward inflation expectations are edging upward. This is not demand-led inflation, but a supply disruption caused by geopolitical events.
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