The U.S. saw its inflation reach a 40-year high last year, thanks to soaring oil prices. This trend had been expected to reverse by 2023.
The benchmark crude oil price has risen by more than 18% in the last month. This is driving up the costs of American workers’ commutes and freight haulers’ trips between warehouses, as well as the production of plastics, fertilizers, and clothing.
The gains could be a threat to inflation. Investors were betting on the Federal Reserve’s campaign that would see interest rates increased. Although the central bank’s preferred measure of inflation excludes volatile energy and food costs, many fear that rising oil costs will increase costs across the board.
Mike Kucharski said, “You pay for it in the grocery store with the cost of household goods, building materials.” JKC Trucking is a 200 truck operation located in Illinois. “Everyone can feel the high cost.”
JKC has paid a high price for diesel during the summer heatwaves, as its refrigerated semitrailers have to burn more fuel in order to keep lettuces, melons, and other produce cool while they are being transported. Kucharski explained that the company updates its fuel surcharge once a week for customers, but in recent days, prices have risen rapidly and his company had to absorb some of these costs.
The Russian invasion of Ukraine in early last year caused oil prices to surge. The prices started to drop last summer, after President Biden shipped around 200 million barrels. Prices began to fall last summer after President Biden sent roughly 200 million barrels of U.S.
In the last three months, wholesale diesel prices have risen by 36%. Jet fuel has risen by almost 40%, and gasoline is up 19%.
Investors’ bets on the Fed’s ability to pull off an so-called “soft landing” are being challenged by the surge. In this scenario, the Fed would ease inflation down to the central banks’ 2% target while not slowing the economy too much so that it tip into recession. The Fed increased rates last month to their highest level in 22 years.
Continued increases in oil prices may indicate the resilience of the economy. A rise in oil prices that is too rapid could mean the Fed needs to raise rates for longer.
In June, inflation eased to 3% compared to the previous year. A steep decline in energy prices helped bring down consumer-price index at its lowest pace in over two years. Core inflation, which excludes energy and food to concentrate on service costs, has slowed down to 4.8% per year.
The rise in crude prices is likely to boost overall price pressures in the months leading up to the Fed’s September meeting, when investors expect an end to interest rate increases. Analysts claim that higher oil prices, which are evident at every gas station, cannot be ignored even if the central bank doesn’t use them as a preferred inflation measure.
Barry Bannister is the chief equity strategist of Stifel. He said that food and energy are “leading indicators” to core inflation, even if they don’t make up a large part.
Wall Street analysts predict that oil prices will rise slightly in the remainder of the year. Although benchmark gasoline futures are flattening out after the July rally, motorists across the country still feel the pinch.
James Revia’s family of six, who lives in a high-rise mobile home in High Island in Texas, increased his lawn-mowing rates by $5, to $40, after the gas prices rose last year. The 44-year old is hesitant to do so again even though higher gas prices have made it costlier to fuel his Ford truck and mower.
Revia said, “If you raise your prices too much, you won’t have any lawns to mow.”