What to know:
- Brent crude climbed above $100, raising fears of a sharp US inflation rebound in July.
- June CPI fell 0.4% as falling energy and gasoline prices eased US inflation pressure.
- Fed officials will meet before July CPI data reveals the oil surge’s impact on prices.
The oil price surge has raised fresh concerns about a sharp US inflation rebound in July. Economist Peter Schiff said Brent crude’s climb above $100 could reverse June’s price relief. Falling energy costs had helped headline inflation decline during that month.
Schiff issued the warning after the oil prices had recovered swiftly from their lows since June amid a significant drop in energy prices. In a post on X, Schiff said that oil had risen by 30% in July. It had already returned above $90 per barrel when he commented.
“Investors celebrated the June CPI, as a 30% fall in the price of oil led to a larger-than-expected decline.”
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Oil Price Surge Threatens June’s Inflation Drop
He said that a climb to $100 before month-end will be a 43% gain from the lows. Brent broke through that level just a few hours later. The attacks on Saudi tankers posed yet another risk to energy transport in the Middle East.
Schiff said the oil price surge could make the July Consumer Price Index report particularly strong. Schiff’s warning is concerned mostly with the headline inflation that contains energy prices. The core CPI uses another measure that does not contain energy.
According to the Bureau of Labor Statistics data, headline CPI had fallen by 0.4% in June as compared to May. According to economists’ predictions gathered by Reuters, the expected decline was 0.1%. Year-on-year inflation eased to 3.5% from 4.2%, beating the 3.8% expectation.
Much of the relief came from energy prices. The energy index tumbled 5.7%, the largest monthly drop since April 2020. Gasoline prices tumbled 9.7%, while core CPI was flat and gained 2.6% compared to the same month last year.
How Supply Risks Pushed Brent Above $100
The oil price surge came in the wake of supply worries that changed the market dynamics after June’s downturn. On Thursday, Brent spiked about 7% to $100.71, reaching its highest level in nearly two months. Also, WTI climbed above $90 for the first time since June.
According to a Reuters report, Iran has stopped exporting its oil since the conflict has cut exports down from 2 million barrels per day to nearly zero. Goldman Sachs said that the price of Brent would be over $120 should the disruption continue. The prediction depends on the extent and length of the supply cuts.
The oil price surge has altered expectations for the next Fed meeting. Futures market participants still preferred no rate action in the next meeting by July 23. Market pricing suggested a 64.2% probability of maintaining the 3.50%-3.75% target range.
What Rising Oil Means for the Fed
Data from the CME FedWatch Tool shows a 35.8% probability of a rate hike of a quarter point. This possibility increased sharply from 10% since July 14, following the release of June inflation data. The previous data followed June CPI, coming under expectations.
Policymakers would not have access to July inflation data until they make a decision about rates. The Bureau of Labor Statistics scheduled the report for August 12. Therefore, policymakers will gather at the meeting without the influence of the oil price surge on consumer prices.
Schiff’s warning put energy prices at the center of the short-term inflation outlook. Schiff said that the oil price surge could undermine the inflation reduction of June. The July report will tell if rising crude prices pushed inflation upward.
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