The new variable which needs to be considered by the Monetary Policy Council is the US-Israeli strikes on Iran, the upward impact of energy commodities on inflation and downside on GDP and especially investments.
We estimate that a persistent 10% upswing in crude oil may boost CPI inflation by 0.2-0.5 percentage points. The negative impact on GDP is probably of lower magnitude (0.2-0.3pp), but we also need to factor in the long-term effect of geopolitical uncertainty affecting business confidence and undermining private business’s propensity to invest.
If current spot prices of Brent were sustained, it would add up to 1pp to inflation. So, the magnitude of the oil shock poses a significant upside risk to headline CPI, but at the same time, the shock may be temporary in nature and possibly unwind in a few weeks.
The strike on Iran is clearly a supply shock which central banks usually look through. It differs from the Covid/Russia war shocks as these were a combination of supply and demand shocks and caused a more significant rise in prices and de-anchored inflation expectations.
Also, the strike on Iran may dampen economic activity and weigh on business sentiment, with possible adverse effects on investment activity.
At the current juncture, the shock seems to be more persistent risk for private investments than for inflation.