Oil-Price Shock May Strike World Economy at Vulnerable Moment

Oil prices that more than doubled over the last three years have left a surprisingly small imprint on the U.S. and world economies. That may be about to change.

The latest jump in prices, triggered by the Israel-Hezbollah conflict in Lebanon, comes at an inopportune time for the global economy. U.S. growth is slowing and inflation is rising; Europe is only starting to show signs of revival; China and other Asian nations have begun passing earlier price increases on to consumers and businesses.

The world economy is also more at risk because the recent oil run-up is driven more by supply concerns than strength in demand.
“It makes for an ugly situation,” says Allen Sinai, president of consultant Decision Economics in New York and the top-ranked economist in the Wall Street Journal’s latest forecasting survey. The 5 percent increase in crude-oil prices over the last month comes “on top of a U.S. economy that’s vulnerable” and with a Federal Reserve that’s “pretty stuck,” he says.

The big danger: Central banks will squelch global economic growth by jacking up interest rates more than expected to fight an energy-driven rise in inflation.

Bloomberg