Fueling Inflation

This note was on the calendar because it is that time of year, but then Atlas had to rip up the script when the war in Iran started because seasonal issues alone were no longer driving the price of fuel higher.  Initially this note was going to help remind readers that changes to the blend of fuel would be taking place soon as the weather warms. Energy companies blend pricier additives into the fuel during the warmer parts of the year to minimize evaporation. This, of course, gets reflected in the price paid at the pump which is then included in the inflation statistics we all watch.

Starting on the 28^th of February, a new US-Israel led conflict with Iran emerged which threw pricing in the energy complex into a steeper upward trajectory than was already underway. At the start of February, a barrel of West Texas Intermediate (WTI) crude was selling for around $62; that same barrel set a buyer back closer to $67 by the end of the month. Then the headlines hit over the weekend, and the price grew even faster. As of this writing, WTI reached nearly $75 a barrel. This will impact inflation some. If these prices remain elevated or increase further, they will, over a relatively short period of time, find their way into the prices paid at the pump along with the more expensive summer additives.

According to AAA, the price of gas increased 7.8% in the past month. For the sake of making the math easy (you’ll see why in a minute), let’s call the increase 10%. Gasoline represents roughly 3.0% of goods surveyed in the Consumer Price Index (CPI) from the Bureau of Labor Statistics (BLS). A 10% increase raises CPI roughly 0.3% in about a month and does not include the other items in the basket of goods measured by the BLS. When prices spike that quickly, even a small weighting like gasoline can have a noticeable impact on inflation data.

Price stability is one of the Federal Reserve’s two mandates. Ironically, America’s central bank defines “stable” as prices overall rising 2.0% annually. This goal is growing more complicated with the rising prices of energy. It was largely a foregone conclusion that there would not be any more accommodative measures made before Jerome Powell exits his position as Chair of the Federal Open Market Committee in May, but the odds of the overnight lending rate being held steady past his departure as chair is now the most likely outcome at the first two meetings without him at the helm, something that was not the case at the start of February according to the CME Group’s FedWatch tool.

Of course, nothing is set in stone. Global conflicts are fluid, and their impacts on markets are ever changing as well. Energy prices may retreat as rapidly as they rose if tensions ease. But until there is more clarity, elevated fuel costs remain an upside risk for inflation. After the upward impulse in costs coming as a result of the all the money printing during the pandemic, the path to price stability hasn’t been linear and this most recent exogenous shock seems to be giving the path another curve.