Oil spikes, but not yet a concern for central banks

Brent crude oil has jumped by around 4% to ~$74.5pb at the time of writing, following reports that Iran is preparing a ballistic missile strike against Israel. Much remains uncertain. A key issue – if an attack materialises – will be its 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. Iran accounts for about 4% of global oil output, but an important consideration will be whether Saudi Arabia increases production if Iranian supplies were disrupted. As a rule of thumb, a 5% increase in oil prices adds about 0.1%-pts to headline inflation in advanced economies. 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.