New World Invesment Research

As central banks across the world are deciding on their policy trajectories given energy supply shocks and resulting inflation pressures, it is important to be vigilant on how spikes in gas & oil prices do not only lead to supply shocks but also impact the demand side of the economy.

At a certain point, demand destruction begins to outweigh inflation concerns, implying a more dovish monetary stance despite traditional rate hikes’ response to supply shocks. 

It is also possible that, historically, higher energy prices followed by recession periods were not driven purely by stagnation and fall in households’ purchasing power, consumption, and investment, but rather by overly tightening monetary policy in which rates were put too high – further supressing demand and growth.

So the question is, should central banks cut rates rather than hike them if energy prices’ elevation is persistent enough to pass through the economy and undermine demand? If so, how to determine the extent of persistence and when regulators should ease monetary policy?

#inflation #growth #fed #yields #oil