The Fed has currently told markets that it is not thinking of hiking until 2023. However, oil pushing higher could mean the Fed have to shift rate rises sooner than 2023. This is why. Rallying oil increases inflation expectations. Higher energy costs get passed on. Look at the chart showing how WTI prices lift inflation.
The argument against the Fed reacting is that the Fed see energy costs as ‘transient’ , so look through them. However, there is a strong case for rising oil prices. In brief they are as follows:
- OPEC is determined to cut supply
- The leap to green enemy causes key oil infrastructure, like Keystone, to be cancelled
- Economies re-opening will cause oil demand to surge
- The new normal is that higher energy costs are part of the landscape
So, remember the Fed’s ‘target’ is at 2.5% inflation and rising oil prices could be the factor that get’s it there even sooner than 2023. Watch out for oil adding inflationary pressures and possibly triggering a taper tantrum.