Oil prices soar, rewriting inflation script; Fed rate cut timing may be delayed until September

Interface News Reporter | Liu Ting

Data released by the U.S. Bureau of Labor Statistics on Wednesday show that the Consumer Price Index (CPI) in February rose 2.4 year-over-year, a slowdown of 0.6 percentage points from the previous month. The core CPI, which excludes energy and food prices, increased 2.5% year-over-year, unchanged from the previous month.

Analysts note that overall inflation in the U.S. for February was in line with expectations, but external threats—such as the surge in oil prices triggered by Middle Eastern geopolitical conflicts—are rewriting the inflation outlook. It is expected that energy costs will significantly boost CPI growth starting in March, and the Federal Reserve will face more difficult policy choices amid the shadow of stagflation.

Fitch Ratings’ U.S. economist Olu Sonora told Interface News that the February CPI data initially appears reassuring, but it may mask larger risks. He pointed out that from late January to early February, the U.S. federal government experienced another government shutdown due to partisan disagreements over immigration enforcement. This brief shutdown could have affected the Bureau of Labor Statistics’ housing data collection, leading to delays or missing data, which may have resulted in a lower CPI reading for February.

“But more importantly, the February data does not yet reflect the ongoing upheaval in energy prices,” Sonora said.

Since March, under joint U.S.-Israel actions, the situation in Iran has rapidly escalated, leading to disruptions in shipping through the Strait of Hormuz. This strait carries about a quarter of the world’s seaborne oil trade, and markets are generally concerned that the risk of oil supply disruptions will continue to grow. Although the International Energy Agency (IEA) recently announced that member countries agreed to release emergency oil reserves, it has not yet curbed the rise in oil prices.

As of noon on March 12 Beijing time, Brent crude oil futures were around $101 per barrel, up 38% from the last trading day before the conflict (February 27).

Stephen Brown, North America Deputy Chief Economist at Kantar Macro, told Interface News that rising energy prices will soon feed into inflation data. “If oil prices stay at current levels, the March YoY CPI could jump by 0.5 percentage points to 2.9%,” he said. He also noted that AAA data shows the average gasoline price has risen to $3.58 per gallon, the highest in over 21 months.

Analysts believe that if the Iran conflict continues, it could lead the Federal Reserve to delay further rate cuts.

The latest data from the CME FedWatch tool shows that the probability of the Fed holding interest rates steady in March exceeds 98%, and the first rate cut this year has been pushed back from June to September due to the Iran conflict.

Analysts say that the impact of rising oil prices on U.S. inflation occurs on two levels: first, directly increasing energy prices, which quickly reflect in the overall CPI; second, through cost transmission gradually permeating core inflation, affecting the core Personal Consumption Expenditures (PCE) Price Index that the Fed monitors more closely.

Sonora pointed out that for the Fed, the real focus is on core PCE. Rising energy costs will push up transportation, manufacturing, and other sector costs, ultimately reflected in core goods and services prices. “This indicator is still running close to 3% YoY. If the Iran conflict pushes energy prices higher and this feeds into core inflation, inflation risks will remain persistent,” he said.

What makes the Fed even more concerned is that oil prices surge amid signs of weakening in the labor market.

Last week, the U.S. Bureau of Labor Statistics reported that non-farm payrolls decreased by 92,000 in February, and the unemployment rate rose 0.1 percentage points to 4.4%.

Puyi International Chief Macro Analyst Jin Xiaowen told Interface News that the much weaker-than-expected February employment data indicates that the labor market has not yet recovered. Coupled with the upcoming inflation rebound, this suggests the Fed will face a classic stagflation scenario—slowing economic growth alongside rising inflation risks.

Seema Shah, Chief Global Strategist at Principal Asset Management, also said that the slowdown in the labor market and rising inflation are pushing the U.S. economy toward stagflation, which is concerning for markets already dealing with various negative factors.

Analysts point out that in the coming months, the Fed’s policy path will depend on three key questions: How long will oil prices stay high? Will energy prices transmit into core inflation? And in the context of a weakening labor market, can the Fed withstand the dual pressures of stagflation?

Sonora stated that the Fed can currently only wait—wait for the geopolitical conflict to clarify, wait for the effects of oil price transmission to become clear, and wait to see whether inflation or the labor market presents a greater risk. In this complex game, the oil tankers in the Strait of Hormuz may be more decisive for the future of the U.S. economy than the Fed’s dot plot.