US: Oil price surge adds new challenges for Fed – MUFG

Rising Oil Prices Intensify US Inflation Concerns

Derek Halpenny, Head of Research at MUFG, notes that escalating oil and gasoline costs, driven by ongoing Middle East tensions, are likely to accelerate US inflation. With the March Consumer Price Index (CPI) report approaching, expectations are for a significant increase. Halpenny also points out a notable surge in the ISM Services prices paid index, coupled with signs of a softening job market. Despite the possibility of more hawkish signals from the Federal Reserve’s meeting minutes, MUFG maintains its outlook for eventual rate reductions, given the underlying weakness in economic growth.

Geopolitical Tensions Fuel Price Pressures

Although reports suggest that shipping activity through the Strait of Hormuz is recovering, which could temporarily stabilize crude oil prices, the risks to both inflation and economic growth are set to rise. The upcoming release of the March CPI report on Friday will offer early indications of how these developments are impacting inflation.

Forecasts indicate that the monthly headline CPI could climb from 0.3% in February to 1.0% in March, marking the largest monthly increase since June 2022, shortly after the onset of the Russia-Ukraine conflict.

The inflationary effects of the Middle East crisis are expected to be felt swiftly. The latest ISM Services report showed the Price Paid index jumping from 63.0 in February to 70.7 in March, reaching its highest level since October 2022. This one-month increase is the largest seen since 2012.

Gasoline prices, in particular, have been heavily influenced by the conflict. In March, the AAA daily average price per gallon surged by 36.2%, with further gains recorded in April. While these rising costs have yet to significantly affect consumer sentiment, a broader impact on confidence is anticipated in the coming weeks, especially if the ISM Services employment index is accurately signaling a weakening labor market.

This week will also see the release of the Federal Open Market Committee (FOMC) minutes from March, which may highlight differing views on future policy direction. The median projection for 2026 interest rates was set at 3.375%, suggesting a single rate cut this year. However, this forecast assumes a notably weak labor market, raising the possibility of more hawkish commentary in the near term, particularly in light of last week’s NFP data.

(This article was produced with the assistance of artificial intelligence and reviewed by an editor.)