How will decreasing oil prices affect fuel inflation?
By Trend
The fall in oil prices over the past couple of months will drag down fuel inflation across the emerging world, but it probably won’t be enough to prompt policymakers to slow the pace of monetary tightening, according to the UK-based Capital Economics consulting.
"After all, the impact of weaker fuel inflation on the headline rate is likely to be mitigated by other factors. A number of emerging economies are facing mounting capacity constraints and, as a result, core inflation is set to rise further over the next six months or so," said the report from Capital Economics.
All told, aggregate EM inflation is set to strengthen over the same period, according to the company.
"The pick-up in inflation, particularly core prices, will be a concern to EM policymakers and supports our view that the tightening cycle we have seen in 2018 has further to run. Inflation in the emerging world continued to accelerate last month. Our measure of aggregate headline inflation increased from 4.1 percent year-on-year in September to 4.2 percent year-on-year in October," said the report.
Capital Economics believes, that was driven by a pick-up in fuel inflation from 19.1 percent year-on-year to 19.5 percent year-on-year in October.
"The fall back in oil prices since the middle of October – Brent crude is now at around $63 per barrel – means that the support from fuel inflation looks set to ebb in the coming months," said the report.
"The rise in fuel inflation was accompanied by an increase in core price pressures across the emerging world. Core inflation edged up to a ten-month high of 3.3 percent year-on-year in October, and we expect that this will continue into Q1 next year as a number of EMs face mounting capacity constraints."
The rise in both core and fuel inflation more than offset a modest fall in EM food inflation last month, according to the consulting company.
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