When will rising oil prices shift from inflation risk to growth risk?

Investing.com - Morgan Stanley pointed out in a report to clients on Friday that rising oil prices are becoming a core risk variable for the U.S. economy, with the balance between inflation and growth depending on the trajectory of the Middle East conflict.

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The analyst team led by Michael Gapen stated that the recent outlook hinges on whether rising energy costs begin to suppress demand or merely drive up inflation.

Morgan Stanley wrote, “Oil price shocks tend to have convex and nonlinear effects.” The bank warned that moderate price increases often “push up inflation and suppress economic activity,” while more severe increases could “destroy demand, thereby dominating growth effects.”

Morgan Stanley is monitoring multiple indicators to determine when the balance may shift. Retail spending is the first key indicator.

The bank noted that oil price shocks “tend to reduce consumer spending on goods rather than on services,” adding that this impact should be reflected in weakened retail sales data excluding gasoline. However, the critical March report will not be released until April 21.

So far, labor market data remains resilient. Morgan Stanley expects that overall nonfarm payrolls will increase by 60,000 in March, with private sector employment rising by 70,000, and stated that initial claims for unemployment benefits “have not shown an increase in layoffs.”

Business confidence is another pressure point. The bank emphasized that the deterioration of the confidence index tracked by the National Federation of Independent Business (NFIB) will have an impact, as “uncertainty shocks can dampen job growth, especially when the NFIB confidence index is below 100.”

Financial markets may provide the earliest signals. The bank stated that inflation-linked securities (such as TIPS) can serve as “high-frequency indicators of demand destruction,” particularly in a context of rising oil prices.

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