Sharply higher oil prices have the potential to re-ignite inflation.
Last week saw oil prices hitting their highest point in 10 months following news that Russia and Saudi Arabia will extend their oil production cuts through December. This week, Brent crude hit $90 per barrel for the first time since last November (see the chart), while U.S. oil prices have jumped approximately 10% over the last two weeks.
Since then, gas prices—already on the rise for much of the year—have surged in many areas of the country. In the Midwest, for example, pump prices are expected to spike by 50 cents or more per gallon. Nationwide, gas prices now stand at $3.82 per gallon—up more than 18% since the start of 2023.1
From an investment perspective, rising oil prices constitute a double-edged sword:
- On the one hand, our portfolios’ overweight position in the energy sector has been favorable in the recent environment.
- That said, investors are increasingly worried that rising oil prices (if sustained) could rekindle widespread inflation—and force the Fed to keep interest rates high or even raise them again. The latest inflation report (CPI), released this week, showed that U.S. consumer prices jumped 0.6% in August—the most significant increase in 14 months—mainly due to higher oil prices. Overall, energy contributed 0.4% to August’s price increase.
There’s also the potential impact of high gas prices on overall consumer demand. Research2 shows consumer sentiment becomes more pessimistic with rising gas prices—and as consumers become less certain about their financial prospects, they tend to rein in their spending. Given consumers’ crucial role in keeping the current economy strong, we’ll be watching this factor closely in the coming months.
2 Binder, Carola and Makridis, Christos, Stuck in the Seventies: Gas Prices and Consumer Sentiment (May 20, 2019).
1 FRED®, August Labor Force Participation Rate
2 August Jobs Report: US Job Growth Forges On, The New York Times, September 1, 2023.
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