The global economy risks suffering a renewed inflation shock from the war between Israel and Hamas, a leading credit rating agency has warned, amid growing concern over a sharp rise in oil prices.
Standard & Poor’s, which rates the creditworthiness of governments and companies, said the conflict threatened to compound an already fragile global outlook, as the world’s leading central banks battle inflationary pressures sparked by the Covid pandemic and war in Ukraine.
Oil prices rose on Wednesday, touching $93 a barrel, as traders reacted to the prospect of an escalating conflict, after a devastating blast at a Gaza hospital during Joe Biden’s one-day visit to Israel.
Highlighting the risks of a renewed energy supply shock, figures from the UK published on Wednesday morning showed the annual inflation rate unexpectedly held steady in September after a sharp rise in fuel costs.
Standard & Poor’s warned a further increase in energy prices triggered by escalating conflict in the Middle East “could underpin inflation and weigh on economic activity”.
While not underestimating the severity of the unfolding human tragedy, the agency said it expected the conflict would be largely contained to Israel and Gaza. However, there were still dangers for the global outlook and “extreme tail risks” should Iran become directly involved.
“Even in the absence of a material energy supply shock, the evident sensitivity in energy prices to recent events indicates that some inflationary pressures could persist through the northern hemisphere winter,” it said.
Underlining the risk of high prices at the petrol pumps, figures from the Office for National Statistics showed UK inflation was unchanged at 6.7% last month, as the first month on month fall in food prices for two years was offset by a jump in the cost of petrol and diesel.
Crude oil has risen from a low of about $72 a barrel in June to over $90, putting at risk progress made to bring down the highest inflation rates in decades after the surge in energy prices fuelled by Russia’s war in Ukraine.
A finely balanced Bank of England decision on interest rates is due in November, after the central bank last month paused its most aggressive cycle of rate increases in decades.
Financial markets expect the Bank to leave rates at the current level of 5.25%. While inflation remains at more than three times higher than the Bank’s 2% target, concerns are growing over the strength of the economy after 14 successive increases from a record low of 0.1% in December 2021.
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Despite remaining unchanged on the month, economists said inflation in the UK was still on track to drop below 5.1% by December – meeting Rishi Sunak’s pledge to halve the rate this year – helped by cooling food price growth and this month’s drop in the Ofgem energy price cap.
The chancellor, Jeremy Hunt, said: “As we have seen across other G7 countries, inflation rarely falls in a straight line, but if we stick to our plan then we still expect it to keep falling this year. Today’s news just shows this is even more important so we can ease the pressure on families and businesses.”
Paul Dales, the chief UK economist at the consultancy Capital Economics, said he didn’t expect the Bank to raise interest rates again. “The new risk, though, is that events in the Middle East restrain how far inflation falls next year.”
September’s inflation rate is normally used by the government to increase the value of benefits the following April. However, Sunak has so far refused to commit amid speculation he is considering a below-inflation rise as the government grapples with tight public finances.
“For ministers to cast doubt on whether they will deliver this uprating in full is unacceptable,” Alfie Stirling, the chief economist of the Joseph Rowntree Foundation poverty charity, said. “Millions of families need the certainty that benefit payments will begin to recover some of the significant real-terms losses suffered over the past two years, and they need that certainty now.”
