MUFG’s Head of Research Derek Halpenny argues that rising Oil and gasoline prices from the Middle East conflict are set to push US inflation higher, with March CPI expected to jump. He highlights a sharp rise in ISM Services prices paid and weakening employment indices. While Fed minutes may sound more hawkish, MUFG still anticipates future rate cuts as growth fundamentals remain softer.

Conflict-driven price pressures build

"The fact that the traffic through the Strait of Hormuz is reportedly picking up may well help to cap the price of crude oil over the short-term (and explain that backwardation) but the inflation and growth risks will continue to increase going forward and this week will provide some insight into the initial inflation impact with the release of the March CPI report on Friday."

"The headline MoM CPI rate is expected to pick up from 0.3% in February to 1.0% in March – that would be the biggest gain since June 2022 soon after the start of Russia’s invasion of Ukraine."

"The inflation hit from the Middle East conflict will feed through quickly and yesterday’s ISM Services report revealed a sharp jump in the Price Paid index, from 63.0 in February to 70.7 in March, the highest reading since October 2022. The one-month change in the index level was the largest since 2012."

"The price of gasoline is one inflation channel where the impact of the conflict is very evident to see. The price increase in the AAA daily gasoline per gallon price in March was 36.2% and the price so far in April has continued to gain each day. The increases have not yet had a notable impact on consumer confidence but that is likely to change over the coming weeks as the inflation impact broadens out, especially if the ISM Services employment index is correctly indicating a downturn in the jobs market."

"The minutes from the FOMC meeting in March will also be released this week (Wednesday) and is likely to reveal division over the policy outlook ahead. The median dot for 2026 revealed in March was 3.375% - implying one rate cut this year. But the assumption built into that median dot was very much a weak labour market and hence the danger over the short-term is for the rhetoric to skew more hawkishly following the NFP data last week."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)