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 Since then, Brent crude futures have risen 45 percent. If that is
sustained or even increased throughout this year, inflation next
year could rise significantly, posing questions for policymakers
largely committed to ultra-loose policy.
No fewer than 27 central banks around the world have eased monetary
policy to some extent this year in a battle against deflation,
slowing growth or both.
These measures have ranged from interest rate cuts to bond-buying
"quantitative easing" programs. All have been in response to the
fall in inflation rates and inflation expectations driven by the 60
percent collapse in oil prices over the latter part of last year.
Investors' bets on the timing of the first interest rate increase
from the U.S. Federal Reserve were pushed back to late this year or
maybe even 2016, the euro plummeted and global stocks rose to new
historical peaks.
But many of these market moves have stalled, some even reversing.
Inflation assumptions baked into index-linked bonds have rebounded,
the euro is up five weeks out of the last six, and asset prices of
oil exporters such as Russia have recovered a large chunk of last
year's dramatic oil-led slump.
"Deflation fears are overdone and we're seeing some upside surprises
now, although risks of persistent low inflation remain," said Ruben
Segura-Cayuela, peripheral euro zone economist at Bank of America
Merrill Lynch in London.
"A positive oil shock has a detrimental effect on growth and
activity, and could generate some volatility, " he said.
SEEKING A HIGH-YIELD ENERGY HIGH
There are various estimates on how much changes in the oil price
affect growth and inflation.
Brent crude futures have risen $20 from January's low to $65 a
barrel <LCOc1>. That's a 45 percent increase. WTI futures <CLc1>
have jumped $15 from March's low to $58 a barrel. That's a rise of
almost 40 percent.
Deutsche Bank's chief international economist, Torsten Slok, says a
50 percent increase equates to core U.S. inflation rising 0.9
percentage points a year later. That would lift inflation above the
Federal Reserve's 2 percent target, which hasn't been met for three
years.
Economists at UBS estimate that a $15 rise in oil would raise U.S.
inflation by 0.6 percentage points over the next year, $25 would
equate to 1.0 percentage point and $35 would add 1.4 percentage
point.
Their equivalent estimates for the euro zone are: a $15 rise adds
0.5 percentage point to headline inflation, $25 equates to 0.8
percentage point and $35 equals 1.1 percentage point.
Even the most extreme of these scenarios is unlikely to sway the
European Central Bank, the Fed or any major central bank from the
course they are steering - a 1 trillion euro QE bond-buying spree
from the ECB through September next year, and a probable rate rise
from the Fed late this year.
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And if monetary policy is unlikely to choke off any rebound in
inflation expectations, that underlines the need for markets to
build in higher future inflation rates than they were doing at the
turn of the year.
Inflation markets have already reacted. The so-called five-year
forward, which measures five-year euro zone inflation expectations
in five years and is the ECB's favored gauge, has climbed to 1.7
percent from a record low beneath 1.5 percent.
This still falls short of the ECB's inflation target of "below, but
close to" 2 percent, but Mario Draghi and his colleagues will be
relieved it is at least moving in the right direction.
U.S. inflation expectations have also rebounded from multi-year
lows. Two-year inflation expectations have risen to 1.6 percent from
-0.16 percent as recently as mid-January, notes David Absolon,
investment director at Heartwood Investment Management.
The 10-year breakeven rate, the difference between the nominal
Treasury yield and the real yield on inflation-linked bonds, has
risen to 1.9 percent from 1.53 percent.
That drift higher should continue as long as oil prices remain firm,
lifting the breakeven rate back towards the longer-term average back
above 2 percent, said Iain Stealey, fund manager of the JP Morgan
Global Bond Opportunities Fund.
"We've already seen some movement. But there might still be room for
that to continue further," he said.
Another area investors might look to gain from firmer oil prices is
in U.S. high-yield bonds in the energy sector, which has
outperformed the broader index this year as oil has recovered.
They've outperformed the wider high-yield market by about 240 basis
points this year. Yields on energy bonds have fallen to 8.1 percent
from a peak of 10.4 percent in December. Those on the broader index
have fallen to 6 percent from 7.3 percent over the same period.
(Editing by Susan Fenton)
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