Bank of America analysts say that the sensitivity of U.S. economic growth and inflation to oil price shocks has decreased.

Investing.com - U.S. Bank analyst said in a research report that, compared with previous years, the sensitivity of the U.S. economy’s growth and inflation to oil price shocks has declined.

As this report is released, major economies, especially the United States, have been plagued by rising oil prices and inflationary pressures, which has become a key concern for policymakers. Rising oil prices have forced the Federal Reserve to keep its benchmark interest rate unchanged. Several Federal Reserve officials have voiced increasing concerns about inflation in this global’s largest economy.

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Since the 1970s, the global economy’s reliance on oil has dropped significantly. Today, the amount of oil needed to produce the same amount of GDP is only about one-third of what it was in the early 1970s. The report adds that this decline in reliance is driven mainly by improved ability worldwide to cope with supply disruptions.

The analysts noted that the improvement in the U.S.’s shock-absorption capacity is the most significant. In the 1970s, a 10% rise in oil prices would typically lead to inflation rising by 90 basis points. Today, the same shock would result in inflation rising by only about 25 basis points.

Although global conditions have improved, the report warns that Europe’s sensitivity to oil price shocks is still about twice that of the United States. The analysts estimate that a 10% increase in oil prices would raise euro area inflation by 40 basis points and reduce economic growth by more than 10 basis points.

This higher sensitivity is attributed to the fact that energy makes up a larger share of European consumers’ spending (9-10%, compared with 6-7% in the United States), and that the region remains a net energy importer. The study findings are also reflected in Bank of America’s latest global economic forecast, which takes into account a scenario in which oil prices rise by 40% after the outbreak of war. The report shows that while the U.S. growth forecast is cut by 30 basis points due to the conflict, the euro area’s growth forecast is lowered by a larger amount, reaching 60 basis points, while inflation expectations are raised by 160 basis points.

The report said: “The shift toward lower sensitivity to oil is still reassuring.” It added that while the current conflict brings challenges, the global economy’s ability to deal with these challenges is far greater than it was in past crisis periods.

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