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Charles Kennedy

Charles Kennedy

Charles is a writer for Oilprice.com

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Are Rising Gas Prices Driving The Fed Toward More Rate Hikes?

  • U.S. producer price inflation rose 2.2% annually and 0.5% monthly in September, majorly influenced by a 5.4% increase in gasoline prices.
  • Oil prices surged following extended production cuts by Saudi Arabia and Russia and uncertainties from Middle East conflicts, although Saudi Arabia commits to maintaining stable prices.
  • While Germany expects its GDP to contract due to high energy prices and inflation, the U.S. anticipates a possible increase in consumer inflation, leading to more rate hikes by the Fed.

Higher gasoline prices pushed U.S. producer prices up in September, fueling worry that there is still a long way to go before inflation is tamed.

Indeed, with the current degree of oil price volatility, the taming has suddenly become quite questionable.

The Bureau of Labor Statistics reported this week that producer price inflation for September had gone up by 2.2% on an annual basis and 0.5% on a monthly basis. The rise in prices was higher than expected. The culprit behind the rise: fuel prices.

Gasoline prices alone added 5.4% in the reported month, contributing 40% of the broader price rise, sparking questions about further rate hikes by the Fed, which would in turn fuel doubts about the growth prospects of the world’s largest economy.

Oil prices topped $90 per barrel in September after yet another extension of the production cuts Saudi Arabia and Russia implemented earlier in the year with the stated goal of keeping the market balanced and the perceived goal of keeping prices higher.

Meanwhile, the latest flare-up of violence in the Middle East put a huge question mark over the future of oil supply security from the region, igniting another surge in prices. This one was short-lived, however, because of the high degree of uncertainty about whether the conflict will spread across the Middle East and, if yes, how fast.

Saudi Arabia said yesterday it was working with its regional partners to prevent a further escalation of the violence and said it was committed to keeping oil prices stable. The market apparently read this as a commitment to keep the oil flowing, and prices fell.

However, on the same day Saudi Arabia signaled it would continue keeping a lid on its oil production along with its OPEC+ partner Russia after a meeting between Riyadh’s Abdulaziz bin Salman and Moscow’s Alexander Novak.

Prices remain subdued for now, not least because of more bearish economic news, such as Germany’s confirmation it was going to book a GDP contraction of 0.4% this year because of what Reuters called persistent inflation.

The root of that persistent inflation is the same as in the U.S.: high energy prices. Thanks to them, Germany is looking at an annualized inflation rate of 6.1% for this year. The International Monetary Fund is even more pessimistic, expecting Germany to contract by 0.5% this year.

“Gyrations in oil prices could create pipeline price pressures ahead after producer prices moderated less than expected in September. The Fed will likely proceed carefully amid adverse supply shocks and with annualized core PPI running well above policymakers’ 2% inflation target.”

That’s according to a Bloomberg Economics analyst ahead of the release of consumer price inflation, due out later today. Expectations among analysts are for a 4.1% annual inflation rate and a 0.3% monthly increase, which is considered a positive development and a sign of cooling inflation. Based on the producer price changes, however, these expectations might also get surpassed by actual numbers.

A higher-than-expected consumer inflation reading would motivate the Fed for more rate hikes, and that would be more bad news for the U.S. economy on top of recent indications that the global market for U.S. government debt may have become saturated. Such developments would be bearish for oil prices in a dubious silver lining.

Meanwhile, the Middle East will remain in the public eye, with the big question whether the war will see more regional involvement after reports that other Islamist groups were declaring support for Hamas and readiness to join the attacks on Israel.

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Indeed, among the latest updates from the warzone are reports of Hezbollah attacking Israel from southern Lebanon and Israel responding with rocket fire. This suggests Saudi Arabia’s work with regional and international partners, per the official statement, would be quite challenging, keeping the war premium on oil prices and making inflation prospects in key markets grim.

By Charles Kennedy for Oilprice.com

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