The World Bank has cautioned that a significant escalation of tensions in the Middle East could propel oil prices above $100 (£80) per barrel and reverse the recent downtrend in global inflation.
Despite the recent decline in commodity prices, the World Bank stated that this trend had begun to stabilize even before the recent missile strikes by Iran and Israel. This development poses challenges for central banks in making interest rate decisions.
However, the World Bank noted that its forecast of crude oil prices averaging $84 a barrel for this year might be overly optimistic if the crisis were to worsen.
Concerns about a potential full-scale conflict in the Middle East have already triggered an increase in oil prices and higher fuel costs for drivers.
Brent crude oil is currently trading at $87 per barrel, while the average price of unleaded petrol in the UK has surpassed £1.50 per litre for the first time since last November.
The World Bank’s latest report on commodity markets stated: “A moderate conflict-related supply disruption could raise the average Brent price this year to $92 a barrel. A more severe disruption could see oil prices surpass $100 a barrel, raising global inflation in 2024 by nearly one percentage point.”
Between mid-2022 and mid-2023, global commodity prices experienced a nearly 40% decline, contributing to a significant drop of almost two percentage points in global inflation during that period. However, since mid-2023, the World Bank’s commodity price index has remained largely unchanged.
Financial markets have already adjusted their expectations regarding the scale and pace of interest rate cuts this year due to higher-than-expected inflation.
Indermit Gill, the World Bank chief economist, emphasized: “Global inflation remains resilient. Falling commodity prices, a key driver of disinflation, have essentially reached a standstill. This suggests that interest rates could stay higher than currently anticipated this year and next.”
The World Bank also warned that an escalation of the Middle East conflict could drive up prices of natural gas, fertilizers, and food.
Interruptions in LNG supply, particularly through the Strait of Hormuz, could lead to substantial increases in fertilizer prices, subsequently affecting food prices.
Assuming the crisis does not intensify, the World Bank’s baseline forecast predicts a decline of 6% in food prices in 2024 and 4% in 2025. Fertilizer prices are expected to drop by 22% in 2024 and 6% in 2025.
Moreover, the World Bank highlighted the increase in investment in green technologies, which has driven up prices of key metals essential for the global clean-energy transition.
Prices of copper, crucial for electricity-grid infrastructure and electric vehicles, surged to a two-year high in April and are forecasted to rise by 5% in 2024 before stabilizing in 2025.
Similarly, aluminum prices are expected to increase by 2% in 2024 and 4% in 2025, driven by the production of electric vehicles, solar panels, and other renewable-power infrastructure.
