With the crises in the Red Sea and the Middle East, oil prices rise but inflation falls, here's why

It is true: geopolitical tensions are already having tangible effects, e.g. the Houthi attacks in the Red Sea curb intercontinental transport and thus trade in goods. The prices of some commodities are affected, as in the case of crude oil, whose prices have also been affected by production restrictions in some OPEC+ countries. But, emphasises the Parliamentary Budget Office in the April cyclical note, "at the moment the weak demand conditions and high inventories are dampening the transmission of cost increases on prices".

Since autumn, inflationary pressures have subsided and wage dynamics have remained subdued, partly due to moderate price expectations. The spread of the inflationary wave continues to soften: in the first two months of 2024, 42 per cent of expenditure items showed price changes of between one and three per cent over twelve months, and extreme inflation (above five per cent) affected only 14 per cent of the basket. Inflationary pressures upstream in the production chain are receding.

That said, adds the UBP, uncertainty remains high on the return of the most persistent price components, such as services and food. "The instability in the global environment is such that new upside risks to inflation cannot be ruled out."

The escalating geopolitical tensions are in fact among the main causes of the recent rise in the prices of raw materials (starting with oil), in particular crude oil, as well as of the increases in the costs of transporting goods; in addition, intercontinental shipment times are lengthening, leading to possible disruptions in global value chains, with inevitable consequences on world trade flows. The UPB speaks, for the time being, of 'moderate inflationary pressures in the upstream price formation process'.

The price of Brent crude per barrel has been rising moderately since the beginning of 2024. Opec+ decided to extend oil extraction cuts until the middle of this year; Russia will significantly reduce oil production in the second quarter and Saudi Arabia will contribute half of the announced reduction. The decision did not surprise the markets, which had expected the cuts to be extended in view of the sharp rise in production by several rival countries, such as the US. On the other hand, the decline that began last October in the price of natural gas on the Dutch market (TTF), which has brought quotations steadily below EUR 30 per megawatt-hour, continues.