"Rising Oil Prices Again, Warning of Burden on Fed"

Concerns are rising that the recent upward trend in oil prices could pose a burden on the US Federal Reserve (Fed), which is nearing the end of its tightening cycle. Oil prices were one of the main culprits behind last year's worst inflation in about 40 years in the US economy.

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The Wall Street Journal (WSJ) reported on the 7th (local time) that the price of Brent crude, the international oil price benchmark, has risen 21% over the past six weeks, increasing transportation costs for American workers, freight truck shipping costs, and various production expenses. WSJ stated, "The rise in oil prices is bad news for drivers and the Fed," adding, "It could even threaten the market's expectation that the Fed's rate hikes will soon conclude."

Wholesale diesel prices have increased by 31% over the past three months. Jet fuel rose 33%, and gasoline surged 18%. While rising oil prices are often seen as a signal of economic resilience, a steep increase ultimately expands inflationary pressures, potentially forcing the Fed to maintain higher interest rates for a longer period.

After Russia's invasion of Ukraine early last year caused oil prices to spike, the Biden administration released 200 million barrels of the government's Strategic Petroleum Reserve (SPR) into the market, and industrial energy demand slowed, leading to a stabilization. However, recently, led by Saudi Arabia and Russia's production cuts under the Organization of the Petroleum Exporting Countries (OPEC), along with investor optimism about the US economic recovery, oil prices have started to rise again.

The market is concerned that this rise in oil prices not only increases inflationary pressures but could also dampen expectations for an early end to Fed tightening based on recent soft-landing forecasts. The Fed's preferred inflation gauge, the core Personal Consumption Expenditures (PCE) price index, excludes volatile food and energy costs. However, experts note that since rising oil prices directly and indirectly increase costs across all sectors of the economy, the Fed will find it difficult to ignore this upward pressure on oil prices.

Barry Bannister, chief strategist at investment bank Stifel, pointed out, "Energy and food are not included in the core inflation gauge, but they are leading indicators that determine core inflation."

There is a possibility that this oil price pressure will be confirmed in the inflation data released this week. Ahead of the September Federal Open Market Committee (FOMC) regular meeting, July's Consumer Price Index (CPI) and Producer Price Index (PPI) are scheduled to be announced this week. Especially since the employment report released late last week showed mixed results, these indicators, which could provide hints about the Fed's future monetary policy moves, are attracting increased attention. The Fed has already raised the US benchmark interest rate to 5.25-5.50%, the highest level in 22 years.

The US July CPI, to be released on the 10th, is expected to rise 3.3% year-on-year and 0.2% month-on-month. Although the June CPI increase was the lowest in about two years at 3%, the July increase is expected to rebound. The July PPI, to be announced the following day, is also forecasted to rebound to positive territory from a 0.1% decline (year-on-year) the previous month. If these inflation indicators come out higher than expected, concerns about tightening around the Fed will grow, and the New York stock market could also face corrections.

Ryan Beranzer, founder of Klao Advisors, said, "Since gasoline prices have risen in recent weeks, the July CPI released this week may reflect this," adding that investors should remain cautious as fears of inflation and Fed tightening persist.