Oil prices spiked on Tuesday after Iran fired a series of ballistic missiles at Israel, pushing prices to the highest level in nearly one year.
West Texas Intermediate (CL=F) rose more than 5% to trade just below $72 per barrel. Brent (BZ=F), the international benchmark price, also climbed roughly 5% to hover firmly above $75 per barrel.
Tensions in the Middle East have escalated in recent days after Israel launched ground raids in southern Lebanon targeting the Iranian-backed militant group Hezbollah.
The moves higher in oil led to an overall boost in the energy sector (XLE), which was far and away the biggest gainer in the S&P 500 on Tuesday, up over 2%.
One concern around the crude market’s rise is the impact it could have on inflation, as higher energy prices over the long term can often increase input costs for goods and services. This could potentially lead to more price increases across the board, including non-energy categories.
James Reilly, senior markets economist at Capital Economics, wrote Tuesday that “much remains uncertain” in response to Tuesday’s spike in prices.
He argued a key issue will be the attack’s “size and whether it inflicts significant damage, particularly in civilian areas. A major escalation by Iran risks bringing the US into the war, which Tehran will presumably seek to avoid.”
“In any event, the impact on oil prices will remain the key channel of transmission to the global economy,” Reilly added, noting Iran accounts for about 4% of global oil output. “An important consideration will be whether Saudi Arabia increases production if Iranian supplies were disrupted.”
Reilly said, as a rule of thumb, a 5% increase in oil prices adds about 0.1 percentage points to headline inflation in advanced economies like the United States.
“As such, we think that it would take a much larger (and sustained) increase in oil prices to have a bearing on central bank policy.”
Outside Tuesday’s moves, oil has been on a steady downward trend over the past few months amid an improving global supply picture. That’s helped lower overall consumer prices, bring inflation closer to the Federal Reserve’s 2% target.
In a note published Monday, prior to Iran’s attack, Goldman Sachs said it expects energy prices’ contribution to year-over-year CPI to fall further over the next several months, eventually pushing headline CPI as low as 1.9%.
The Federal Reserve cut interest rates by 50 basis points at its policy meeting last month, citing that recent moderation of inflation. But some officials have warned that inflationary pressures remain an upside risk.
“The progress in lowering inflation since April is a welcome development, but core inflation is still uncomfortably above the [Federal Open Market] Committee’s 2% goal,” Federal Reserve Governor Michelle Bowman said on Monday.
Bowman was the lone dissenter in the decision to cut by 50 basis points, preferring to cut rates by just 0.25%.
Alexandra is a Senior Reporter at Yahoo Finance. Follow her on X @alliecanal8193 and email her at alexandra.canal@yahoofinance.com
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