Oil and energy prices are rising in the immediate term, although they’ve already been rising in anticipation of the conflict. The first question is whether oil takes out the 2022 high of $120/barrel, and if so, by how much. Oil at $90 becomes a big inflation problem, especially if it stays there for a while. Oil surging to $120-130 becomes a big problem for the global economy. And today it was close to $120/barrel before going down a bit.
The War With Iran Is Creating an Inflation Shock
The January core Personal Consumption Expenditures (PCE) Price Index is going to be hot based on already released data, likely sending the year-over-year pace to 3.2%, the fastest pace since November 2023. That’s before any impact of what’s happening in the Middle East.
Gas prices have now surged to the highest level in almost two years, with nationwide average gas prices rising over $3.3/gallon. It was close to $2.80/gallon a couple of months ago, which means gas prices have surged close to 20%. Diesel prices have surged even more, hitting $4.12/gallon, the highest since November 2023. Diesel prices were close to $3.50/gallon a couple of months ago. The bad news is that prices are probably heading higher for now.
Higher diesel prices are going to increase transportation costs, which may put upward pressure on food prices as well. Fertilizer costs are also surging as the war disrupts supply and shipping. Natural gas, which is a key ingredient for fertilizer production, has seen prices surge with Qatar (the world’s second largest producer) shutting production.
Global reserve banks has a problem, and so do households
Now with the energy shock, even if you treat that as “transitory,” the case for cutting rates this year isn’t clear-cut. Right now, a better way to look at this is the probability of no more interest rate cuts in 2026. And maybe increasing it, instead.
Of course, higher inflation and higher interest rates are a problem for households as well, especially when the job market is looking a bit shaky, and it isn’t easy to find a job if you lose your current one. That’s a recipe for lower consumer sentiment. We definitely need to keep an eye on all the developments. Meanwhile it is good to rebalance the portfolio with adding oil, utilities, staples, gold/silver, and good stable companies.
*Disclaimer – All the information provided in this blog is to share my findings, thoughts and journey, and is NOT intended to be personal financial advice.
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