Berlin The tense situation caused by the Ukraine war is causing oil prices to rise. In March, the oil price rose by around 20 percent. That jump in March will keep consumer prices 1.5 percent higher for more than two years — even if oil prices were to fall again quickly now. This is shown by a study by the German Institute for Economic Research (DIW), which is available to the Handelsblatt.
For their calculations, researchers Malte Rieth and Lukas Menkhoff used a model based on the interactions between oil prices and inflation over the past 30 years. Above all, precautionary purchases for fear of even higher prices or missing deliveries are currently drivers of inflation.
Due to the oil price shock in March, producer prices are six percent higher within six months. The rise in oil prices will thus amplify the already unprecedented rally in producer prices.
The prices that manufacturers receive for their goods rose by 31.4 percent compared to the same month last year, as reported by the Eurostat statistics office on Wednesday. This is the highest rate since the introduction of the euro more than two decades ago. Energy prices rose particularly sharply, costing 87.2 percent more than a year earlier.
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According to the DIW study, producer prices will begin to level off again after six months. Consumer prices are different: they are not affected as much, but are affected for a much longer time. The reason: Oil is at the beginning of many value chains. In some cases, it will take time for the price shock to reach consumers.
On the other hand, consumers are feeling it across the board, not only in higher fuel prices but also in passed-on costs for many other goods for which oil is required in production.
In addition, the study only shows the direct consequence of the rise in oil prices. Further inflationary effects can be derived from this. DIW researcher Rieth cites a wage-price spiral as an example.
ECB can influence energy prices
Based on the experience of the past 30 years, the study concludes that the European Central Bank (ECB) would theoretically react to inflation by raising the key interest rate. If they acted like the central banks did in past oil price shocks, they would raise the key interest rate from zero to one percent within a year.
In contrast to the US Federal Reserve or the Bank of England, the ECB is still keeping this decision open. Opponents of interest rate hikes justify this by saying that the ECB cannot influence the inflationary prices for energy with its decisions.
Another DIW study comes to a different conclusion. An interest rate hike could therefore lower German energy prices by up to four percent. With interest rates rising, the euro would appreciate, which would lower dollar-denominated oil product prices. However, such a measure would also result in higher unemployment.
The study by Alexander Kriwoluzky, Gökhan Ider and Frederik Kurcz came to the conclusion that an interest rate increase of 0.25 percentage points on the one-year German government bond, for example as a result of an interest rate decision by the ECB, would increase consumer prices in Germany by 0.2 percentage points in the same month percent would reduce.
Inflationary impact of oil embargo questionable
The calculations could take on a whole new relevance if the EU decides to stop supplying Russian oil. Commission chief Ursula von der Leyen announced on Wednesday that her agency was preparing sanctions against Russian oil imports. So far, Europe has covered a quarter of its needs from Russia.
Some observers consider significant price increases for oil to be likely as a result. According to DIW researcher Rieth, however, this is unclear. “It is conceivable that the effect will be limited because the other oil suppliers would still be in competition without Russia,” he says.
At the same time, he suspects only a limited impact of an embargo on Russia. “Oil prices will continue to form on the world market. If Russia finds other buyers, it would hardly be harmed by an embargo,” explains Rieth, who is also an economics professor at the Martin Luther University in Halle-Wittenberg. On the other hand, an embargo makes Russia more independent and creates leeway in other areas to react to the war.
However, it is unclear whether Russia will find other buyers so easily. “The Russian oil fields in the west of the country are insufficiently connected to the markets in the east,” says Simone Tagliapietra of the Brussels think tank Bruegel. The Russians would therefore have to find tankers, “that could be difficult”.
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