Why is inflation rising again around the world?

Energy price increases are pushing inflation back up across multiple countries, a development that has compelled major central banks to raise interest rates. Where central bankers once largely treated oil shocks as transient — a disturbance to be waited out rather than an occasion to tighten policy — current supply risks have altered that calculation. Policymakers are now more willing to consider higher rates even though such moves raise borrowing costs.

The change in stance follows a sharp rise in crude prices, with oil topping $100 a barrel last week. The market environment has been affected by the ongoing Iran war; six months into the conflict the Strait of Hormuz continues to experience disruption. In addition, advances by Houthi forces have posed risks to Saudi Arabian oil flows, compounding concerns about global supply.

Those energy cost pressures are passing into household and business bills, broadening the inflationary impact beyond fuel at the pump. Because rising energy bills feed into general price levels, central bankers face pressure to respond to keep inflation expectations anchored. Historically, central banks avoided hiking rates in response to oil shocks on the grounds that higher rates slow real activity without directly lowering the commodity's price.

Faced with the current combination of persistent supply risks and wider pass-through of energy costs, policymakers are revisiting that old rulebook. They must weigh the trade-off between tightening policy to restrain inflation — which raises borrowing costs and can slow growth — and tolerating higher inflation that could become entrenched if energy-driven price pressures persist.