Oil prices would need to settle near US$100 per barrel for the Bank of Canada and its peers to hike rates to contain the inflationary pressure, according to Capital Economics.
Otherwise, the London-based research firm sees "little chance" the Bank of Canada, the Federal Reserve, and other developed market central banks will resume or extend their tightening cycles in response to rising crude prices.
"We are not convinced that the increase in oil prices has set the stage for a sustained rebound in inflation," Capital Economics' senior global economist Simon MacAdam wrote in a note to clients on Tuesday. "That said, if oil prices rose a lot higher, and stayed there, policymakers would not be able to dismiss the risk of 'second-round effects.'"
His prediction comes as fresh data from Statistics Canada on Tuesday showed gasoline prices rising in August on an annualized basis for the first time since January. That helped accelerate Canada's inflation rate once again to an annual pace of four per cent. StatCan says pump prices rose 4.6 per cent on a monthly basis in August, climbing 0.8 per cent compared to a year ago.
Global oil benchmarks have climbed significantly since the Canadian federal agency compiled its August figures, largely thanks to production curbs by Saudi Arabia and Russia. European Brent (BZ=F) pushed above US$95 per barrel on Tuesday, while North American West Texas Intermediate (WTI) (CL=F) crested above US$93.
"We were forecasting the percentage-point contribution of fuel inflation to the average headline rate in major advanced economies to rise by about one percentage point from the middle of this year to mid-2024," MacAdam wrote. "Our new oil price forecast suggests that this effect could be 0.2 percentage point higher at its peak, so not a game-changer."
On Monday, Citigroup global head of commodity research Ed Morse said higher oil prices could be short-lived, calling barrels over US$90 "unsustainable," while predicting prices in the low-$70 range in 2024. At the same time, Chevron (CVX) CEO Mike Wirth told Bloomberg that he believes the economy can support higher prices, calling for WTI to cross the US$100 per barrel level.
Capital Economics recently boosted its year-end 2024 Brent forecast from US$75 per barrel, to US$85. MacAdam says Brent would have to rise above US$100 per barrel, and "stay there," to cause a more significant effect on inflation via higher retail fuel prices.
He warns "second-round effects" on core inflation measures are the bigger risk for central banks.
"If the conditions are in place for higher oil prices to feed through to core inflation, this arguably raises the chances of a sustained rebound towards a 'twin peak' in inflation," he wrote.
"Firms have been enjoying extensive pricing power, which has allowed them to pass on higher costs to consumers to defend margins to an unusual degree. What's to stop them passing on higher fuel costs too?"
The Federal Reserve is set to make its rate decision on Wednesday. The Bank of Canada's next rate decision is scheduled for Oct. 25.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.