A steady inflation reading of 2.4% in February provided a brief moment of hope for the U.S. economy before being shattered by the geopolitical events of late February. While core prices stayed at 2.5%, the subsequent war has triggered a massive re-evaluation of energy costs. The national average for gasoline has soared, marking a staggering 20% increase in just a few weeks.
This energy-led inflation spike threatens to derail plans for economic easing. Although core inflation—which excludes food and energy—seemed to be stabilizing, the secondary effects of expensive oil will soon permeate other sectors. Higher shipping costs are already expected to drive up the price of groceries, which were already seeing significant monthly gains of 0.4% in February.
The closure of the Strait of Hormuz has essentially removed a significant portion of global oil production from the market, leading to “wild gyrations” in crude prices. Prices hit $120 a barrel before retreating following optimistic comments from the administration. However, the destruction of energy infrastructure and attacks on cargo ships in the region suggest that the supply chain remains in a state of high risk.
Central bank officials are now facing a “stagflation” threat, where they must choose between fighting inflation and supporting a labor market that just shed 92,000 jobs. Senior officials have recently noted that the time to act on rate cuts continues to be pushed back by these growing uncertainties. The Fed’s credibility is at stake, making them reluctant to lower borrowing costs prematurely.
The political fallout of high gasoline prices is a major concern for lawmakers ahead of the midterm elections. While a quick end to the conflict could reverse these trends, the “stickiness” of gas prices—which tend to fall slower than they rise—means that consumer pain will likely last for months. The coming April inflation report is widely expected to be the most dramatic in nearly four years.