Iran War Inflation Threat, US's Poland Troops U-Turn, More
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What is the main topic discussed in this episode?
News when you want it with Bloomberg News Now. I'm Caroline Hepker. The US war in Iran is triggering another wave of price hikes across a global economy that has barely recovered from the last inflation shock. Investors are also starting to worry about the implications for the more than $50 trillion market for G7 sovereign bonds.
How is the US war in Iran affecting global inflation?
Bloomberg Economics says that the oil shock caused by the closure of the Strait of Hormuz is ending the global trend of disinflation. Higher crude, gas and shipping costs are lifting prices across major economies. The impact is clearest in North America and in Europe. US CPI is moving back towards 4%, while inflation in the euro area has risen by around one percentage point. Ali Dorwella is co-CIO at Rock Creek.
The risks just keep multiplying in terms of what investors have to think about and interest rates, consumer sentiment. You know, what is driving inflation? If we don't have some resolution in terms of energy prices, we think all of that will continue to be an increased risk to portfolios. And it will mean more bond volatility, which I think investors have not gotten used to.
Ali Dorwella speaking there, as Rapidan Energy has warned that a closure of the Strait of Hormuz until the end of August would raise the risk of an economic downturn approaching the scale of the 2008 Great Recession. In its latest note, Rapidan said that if the waterway remains shut until August, it would deepen the third quarter supply deficit to roughly six million barrels of oil a day. Now, the EU is slashing its growth forecasts as the scale of the fallout from Iran becomes clearer. The bloc now expects euro area GDP to increase 0.9% this year. That's compared to 1.4% last year. Economy Commissioner Valdis Dombrovskis says both growth and inflation are going in the wrong direction.
It basically confirms what we saw coming, which is stagflationary shock to European economy, meaning a simultaneous slowdown of economic growth and increase in inflation.
Dombrovskis adds if energy prices stay higher for longer, growth prospects for the EU will be roughly halved both this year and next year. The Commission has called for restraint from European countries despite the downturn, fearing a breach of their fiscal rules. Confidence among the lowest earning Britons plunged in May as the Iran energy shock reaches household budgets. GFK's Consumer Spending Index shows those at the bottom are pulling back from purchases even before the worst of the shock actually arrives. Chancellor Rachel Reeves set out a number of measures to try to ease the cost of living crisis.
First of all, we have extended the freeze on fuel duty until at least the end of this year. I understand how concerned families and businesses are at the moment about the implications of the conflict in the Middle East. This is not a war that we started. I've been very open in my views that this war was a mistake. But regardless of that, it is having an impact on people here in the UK.
But the Chancellor has ruled out universal energy bill support in the announcement that she made yesterday. Both Reeves and her Prime Minister, Keir Starmer, have been trying to convey a sense of business as usual despite the leadership battle with Andy Burnham. Iran says that there has been progress in talks with the US, but the country is also trying to set up a permanent toll in the Strait of Hormuz. The semi-official Iranian Students News Agency reported the latest peace proposal from the US has narrowed the gap between the two sides. But a Bloomberg interview with the Iranian ambassador to France revealed that the country was in talks with Oman about setting up a toll system in the Strait.
US Secretary of State Marco Rubio says that would not be feasible.
The conflicting statements on the two sides make it unclear if they are actually any closer to a deal.
Oil prices are consistently trading above $100 a barrel as the world's buffers of reserves shrink rapidly. President Trump says that the U.S. will deploy an additional 5,000 troops to Poland, reversing plans to suspend deployment to the country.
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