Many Asian economies use fiscal policy and reserves to subsidize oil prices for consumers. While this initially dampens the shock, it creates a mixed and delayed effect on inflation and growth, making it difficult for policymakers and investors to predict the ultimate economic consequences.
The key variable in the current oil crisis is its duration. Because the supply shock is expected to last for quarters, not just months, the long-term drag on economic activity becomes a greater concern for markets than the initial spike in inflation, changing the calculus for policymakers.
The Federal Reserve focuses on growth risks from an oil shock as the US services-based economy sees less impact on core inflation. In contrast, the European Central Bank is more likely to raise rates, prioritizing inflation control due to faster price pass-through in the euro area.