The inaugural inflation figures following the onset of the Iran conflict indicated a significant surge in energy prices, influencing overall inflation levels but not significantly affecting core inflation metrics. This situation is expected to keep the Federal Reserve’s interest rates steady for the time being.
Recent data from the Consumer Price Index (CPI) revealed a 3.3% increase in March, primarily driven by energy prices, which soared nearly 11%. Notably, gasoline prices jumped 21.2%, representing approximately 75% of the month’s inflation rise. In contrast, headline prices had risen by 2.4% in February, showcasing stark differences in the inflation landscape.
On the core front, which excludes food and energy due to their volatility, the CPI saw a modest increase of 2.6%, up from 2.5% in February. Independent economist Peter Boockvar characterised the headline inflation as “not unexpectedly hot,” while describing the core figures as “more tame”. He emphasised that the impacts of recent spikes in energy prices and related commodities would take months to manifest in the core inflation rates.
Economist Joe Brusuelas from RSM noted that it could take another two to three months before the Federal Reserve can determine if increasing oil and energy costs are influencing core service and goods inflation. He forecasted that the Fed would maintain its current interest rates due to the ongoing analysis of inflation expectations. Brusuelas stated that the rise in energy prices warranted a patient approach, advising against immediate rate adjustments.
The household product manufacturer WD-40 also reported that geopolitical unrest in the Middle East had led to increased costs for petroleum-based chemicals and materials. The firm explained that changes in raw material costs typically take 90 to 120 days to impact product pricing due to production and inventory dynamics.
A study from the Dallas Federal Reserve assessed potential impacts of a hypothetical closure of the Strait of Hormuz on West Texas Intermediate crude oil prices, which could subsequently affect inflation. The analysis predicted that if such a closure lasted a quarter, core inflation might see a rise of 0.8 percentage points on an annualised basis in April, but this effect would likely vary over time.
Some Federal Reserve officials raised concerns about overlooking the recent surge in oil prices, particularly since inflation has consistently exceeded the central bank’s target of 2% for the past five years. St. Louis Fed President Alberto Musalem highlighted how the recent uptick in energy costs would likely put upward pressure on headline inflation in the near term with some spillover into core inflation.
However, the majority of officials, including Musalem, seem to favour a strategy of maintaining steady interest rates. Ellen Zentner, Chief Economic Strategist at Morgan Stanley Wealth Management, noted that the inflation spike correlates with rising energy costs. She concluded that markets might struggle with the prospect of persistent inflation as long as oil prices remain elevated, but anticipated that the Fed would continue to proceed with caution rather than moving towards rate hikes.
In summary, while the recent increase in energy prices has propelled overall inflation, core inflation remains relatively stable. The Federal Reserve is expected to adopt a patient approach, awaiting clearer signals on how these energy price fluctuations will ripple through to other areas of the economy before making decisive moves on interest rates.
