Impact of the high oil price sticking, rather than just spiking

Oil prices have surged as the Iran conflict threatens supply and, crucially, shipping through the Strait of Hormuz. It is the spot price of oil that hits the headlines, now over $100, the highest level since 2022. But it’s the length of time the price remains at these elevated levels that’s more crucial, and the extent to which it spreads more broadly across the region and damages the energy industrial complex. 

Carl Stick, manager of the Rathbone Income Fund, comments: “It’s not so much the spike in the oil price that matters, it’s the persistence of higher prices that really hurts. 

For the UK, this is mainly an imported, cost‑push shock. Higher fuel costs can lift prices and hence inflation very quickly; higher transport and distribution costs feed through into goods prices. If wholesale energy prices stay elevated, they will also eventually feed into household utility bills, impacting consumers already beleaguered by the cost-of-living crisis. 

The timing is awkward. The MPC’s next decision is 19 March and Bank Rate is 3.75% after a narrow 5–4 vote to hold in February, underscoring how finely balanced the Committee already is. The Bank’s February assessment expected CPI to fall back towards the 2% target from April but stressed that further easing would be a ‘closer call’ and strictly data‑dependent. 

A sustained oil shock raises the hurdle for a near‑term cut. Even if the spot price retreats, the MPC will be focused on whether the conflict has lifted longer-term inflation expectations. The experience of the last few years – read Ukraine – implies greater risk of persistent inflation, rather than a short-term shock.”

Is stagflation a risk?

Stick continues: “Higher energy costs squeeze real incomes and business margins, weighing on growth even as inflation rises. The risk of stagflation increases if disruption lasts months rather than weeks.

So much has changed since the last MPC meeting. It seems inconceivable that the result is anything other than a hold, and more importantly, much more cautious guidance on the pace of any future cuts. What happens beyond next week is of greater importance, on both sides of the stagflation ‘equation’. So, watch out for measures of wage growth and inflation expectations on the one hand, and evidence of weakening demand and labour market slack on the other.

Fund management implications

We do not pretend to know how the current conflict will evolve and we’re wary of narratives offering high conviction and too much certainty. Instead, we’re focused on maintaining a portfolio that is resilient across a range of possible scenarios. We’re retaining some exposure to commodities and energy as ‘insurance’ against further escalation, while leaning into quality businesses with strong balance sheets and durable cash flows. Crucially, we’re sticking with our firm valuation discipline in markets that have already priced in some, but probably not all, potential macro risks.”