Can't turn a blind eye: expect higher inflation

Andreas Cervenka

Reporter and economic commentator

This is a commentary text. Analysis and positions are those of the writer.

Updated 20.28 | Published 20.13

          

          Donald Trump's announcement on Monday that the war will soon be over was taken with surpris 

          in seriousness. Photo: Julia Demaree Nikhinson /AP

Donald Trump's announcement that the war will soon be over does not seem to have reached Iran.

The chaos surrounding the Persian Gulf will lead to rising prices - everything else is wishful thinking.

But it doesn't have to be as bad as 2022.

Everyone has had a bad boss at some point. A leader who is unclear can create both problems and confusion. And unclear is absolutely the kindest word that can be used about  Donald Trump and his government right now.

On Wednesday, when it looked as if the price of oil had stabilized, the US declared in a meeting with the other G7 countries that it was opposed to using strategic oil reserves to try to calm the market. Just a few hours later, the position was reversed: now the US was urging others to open the oil taps. According to the Wall Street Journal, it was Donald Trump who had simply changed his mind. Again.

The danger of starting and fighting wars based on one person's whims is unfolding before our eyes. Donald Trump's announcement on Monday that the war would soon be over was taken surprisingly seriously. But war is not like tariffs, something that can be turned on or off.

For Iran, there is no incentive to stop fighting; on the contrary, the regime has every reason to try to disrupt the oil and energy markets as much and for as long as possible in order to strengthen its position. Its own oil exports are intact and have even risen.

Instead of ending, the war has intensified, with a series of attacks on ships and oil facilities in the past 24 hours.

The decision by the countries in the energy agency IEA to use 400 million barrels of oil from their reserves, more than double the amount after Russia's invasion of Ukraine, is a clear indication of how serious the situation is. The oil reserves can act as a shock absorber but do not solve the fundamental problem, that no oil or gas (except Iranian) can now pass through the Strait of Hormuz.

Norrmally, the equiyalent of 20 million barrels a day are transported through that route. This corresponds to a reduced supply of 600 million barrels per month, i.e. more than what is supplied via the reserves. The war has been going on for almost two weeks.

Since there are other routes for the oil to go, including via pipelines to the Red Sea, the actual loss at the moment is lower than that. According to a recent analysis by the IEA, this is a reduction in production of 10 million barrels a day, a disruption that is unprecedented in history. That figure could rise.

What does this mean? The price of oil has already (at the time of writing) risen by 40 percent since the war began and by 55 percent since the beginning of the year.

If you listen to both oil producers in the region and independent experts, things could get much worse. The CEO of Saudi Aramco, the world's largest oil company, warns of "catastrophic consequences" for the oil market if the war continues, and there are those who believe that the price could rise to $200 per barrel.

Of course, everything depends on what happens in the conflict.

But the effects are already here:

• The world market price of products such as diesel and jet fuel has risen more than oil. This means more expensive transportation of both people and goods. Price increases will quickly follow.
• The market for artificial fertilizers has suffered a historic shock at the worst possible time, in the spring when demand is greatest. The Swedish LRF warns of a major impact on food prices.
• In countries such as India, Vietnam and Korea, rising energy prices are hitting hard. Rationing is already underway there, shorter working weeks have been introduced and schools have closed. Since it is a region where everything from clothes to electronics is manufactured, a cost crisis risks spilling over in the form of higher prices.

The financial market has already begun to adapt to higher inflation. Interest rates have risen – the German ten-year interest rate reached its highest level since 2023 on Thursday and has risen by about 0.3 percentage points since the war began. In Sweden, market interest rates have risen by about 0.2 percent. It may seem like small movements, but the shift from expecting falling interest rates to instead seeing them rise is quite dramatic. Mortgage rates are likely to be raised soon.

How high inflation will be is of course difficult to know. A big difference compared to 2022 is that the economy was then maximally stimulated by zero interest rates and central banks printing money while governments poured in various types of support. That is not the case now, which suggests that inflation will not take off in the same way. But once prices have started to rise, it is usually difficult to stop. Many companies will want to protect their profit margins.

Several countries in Europe are now preparing for a turbulent scenario.

In Germany, prices at gas stations will only be allowed to change once a day. In Greece, a profit cap on food and fuel is being introduced for the next three months, and in Italy, the government is threatening to tax companies that try to exploit the situation.

The EU is also discussing introducing a price cap on gas.

In Sweden, Finance Minister Elisabeth Svantesson has said that she is prepared for the worst.

The most concrete measure so far is that two million barrels of fuel in the Swedish emergency stocks will be used as part of the IEA agreement.

If there are other emergency plans, it is probably time to start talking about them now.