Gulf War Drives Oil Prices to New Heights

UBS economist Paul Donovan notes that the Gulf war has significantly impacted oil prices and consumer price inflation globally. The conflict has pushed up crude oil futures prices by 26% since February, with US diesel prices rising almost 50%. This increase in energy costs is having a ripple effect on major economies, with consumer price inflation exceeding target levels.

Energy makes up only about 7% of the US consumer price basket and around 11% in the EU. However, its indirect impact on transport and production costs cannot be ignored. For instance, if goods are manufactured in China and sold in Europe, the oil used in manufacturing and transportation processes is also accounted for in Europe's energy consumption.

Donovan highlights that measuring an economy's oil consumption does not provide a complete picture of its impact on inflation. The price consequences of the war are the dominant reason for inflation being above target levels in major economies, according to UBS economist Paul Donovan.