Inflation: The danger is back

The war in the Middle East and the closure of the Strait of Hormuz by Iran have caused oil prices to soar. Why is the price of oil still driving general inflation even though more and more houses are being heated with heat pumps and more and more electric vehicles are being used? In Switzerland, petroleum products account for almost 50 percent of the total final energy demand of all energy sources. Although the trend is downward, the share remains high at 45.7% (2024). In addition, the price of gas, with a share of 12.3%, is closely linked to the price of oil. If gas prices rise, this will also lead to higher electricity prices. Electrical energy contributes a further 26.7 percent to final energy demand. Sooner or later, higher oil prices will lead to generally higher energy prices, regardless of the energy source.

The chain of effects of higher oil prices does not stop at energy prices, however. Logically, transport costs rise, but not only: because energy plays a role as an input factor for almost all goods and services, raw materials from A for aluminum to Z for cement become more expensive. These in turn make the production of machines, textiles and cars more expensive. Finally, the price of oil also influences food prices.

The following figure shows a clear correlation between food prices and oil prices. In addition to rising energy prices, the use of fertilizer plays a particularly important role in agricultural production. Prices for the important fertilizer phosphorus react very sensitively to higher energy costs because phosphorus is often obtained through the use of fossil fuels.

Poorer countries are hit much harder by the rise in food prices than rich countries like Switzerland, because the proportion of the total household budget that consumers spend on food is much higher in poor societies.

If the Strait of Hormuz remains impassable for a long time, around a fifth of the internationally traded oil supply will be missing. The longer the Strait remains closed, the more energy prices will rise and the more general inflation will increase. Let us therefore hope that the road will soon be open to traffic again.