Bank of America cautioned that oil market volatility, rather than crude price levels alone, could feed inflation when certain costs rise in step with oil but fail to decline proportionately when crude prices retreat. The firm flagged this dynamic as a potential source of "second-round" inflationary effects if asymmetric price pass-through persists.
In its assessment, the bank pointed to a recent run-up in oil prices tied to renewed disruptions in the Strait of Hormuz and a resurgence of Houthi attacks in the Red Sea following what had been a fragile agreement. Those developments have prompted markets to re-price the likelihood and timing of central bank rate hikes.
BofA noted that the conventional policy response - treating supply shocks as temporary and looking through them - may need reassessment after five years of inflation running above target. The firm questioned whether that textbook approach remains appropriate when supply shocks are occurring with greater frequency and appearing more persistent amid heightened geopolitical tensions.
According to the bank, the increased frequency and durability of supply shocks raises uncertainty about their temporary nature. That uncertainty, the bank argued, could necessitate more active risk management by policymakers and market participants rather than relying on the expectation that inflationary impulses from supply disruptions will quickly dissipate.
The warning also referenced short-term economic releases that could influence market perceptions: the preliminary June durable goods orders report and the Dallas Fed manufacturing index are scheduled for release today. Those data points may affect how markets interpret the near-term inflation outlook and the trajectory of monetary policy.
Overall, BofA emphasised that the indirect channels through which oil volatility translates into broader price pressures - the so-called second-round effects - are the main concern. If sectors and firms adjust prices upward when oil climbs but do not reverse those adjustments when oil falls, the result could be a more sustained inflationary environment that challenges the assumption that supply shocks are purely transitory.
Note: This article relays the assessment provided by Bank of America and reports scheduled data releases mentioned by the firm.