Oil shock revives inflation concerns as Middle East conflict lifts crude

Elevated oil prices tied to the Middle East conflict have put inflation risk back into focus for investors and central banks, according to analysts cited by CNBC. BlackRock estimates the conflict will add about 0.8 percentage points to global headline inflation, with the burden likely to vary by region.

Crude prices slipped in early trading on Friday but were still set for a weekly gain as the United States and Iran continued to exchange strikes, CNBC reported. The rise in energy prices has renewed concern that a geopolitical shock could slow the recent easing in inflation pressures and complicate monetary policy decisions.

BlackRock said in a note that Europe and parts of Asia are more exposed because they rely more heavily on imported energy. For economies that buy a large share of their oil and gas from abroad, higher crude prices feed more directly into domestic fuel costs, utility bills and transport expenses. Those increases can lift headline inflation even when underlying demand is not accelerating.

The issue is particularly sensitive for central banks because energy shocks can move quickly through consumer price indices. Headline inflation includes volatile categories such as fuel and electricity, so an oil-price increase can raise near-term readings even if core inflation measures are more stable. Policymakers then have to assess whether the move is temporary or whether it risks spreading into wages, services and broader price-setting.

OCBC said in a report that the U.S. Federal Reserve would remain focused on upside inflation risks if a new energy shock arrived while labor market data were stabilizing rather than weakening. That combination would make it harder for the central bank to look through higher energy costs, because a resilient labor market could leave policymakers less confident that price pressures will fade on their own.

Yung-Yu Ma, chief investment strategist at PNC Asset Management, told CNBC’s Squawk Box Asia that the improvement in profit margins for U.S. small- and mid-cap companies was encouraging, but he questioned whether those trends could persist through several quarters of higher oil prices and renewed inflation strain.

Ma said Federal Reserve hawkishness is likely to remain in place until energy and oil markets show relief and other inflation pressures ease from their recent move higher. His comments reflect a broader market concern that higher input costs could pressure corporate margins while limiting the central bank’s scope to soften policy.

The geopolitical channel remains central to the inflation concern. CNBC reported that tensions involving Iran, the United States and Israeli forces have raised global worries about energy costs, including risks tied to energy infrastructure and shipping through the Strait of Hormuz, a passage associated with about 20% of global oil supply.

Analysts’ assessments point to an uneven global impact. Import-dependent economies face a more direct hit from higher energy costs, while the United States confronts the policy challenge of managing inflation expectations alongside a labor market that OCBC described as stabilizing rather than deteriorating.

This story draws on original reporting from CNBC.