UBS Chief Economist Paul Donovan expects May United States (US) headline consumer price inflation to rise as higher Oil-related costs are passed through to consumers. He notes firms can protect profit margins by raising prices while demand holds, with US consumers drawing on savings. Donovan argues Federal Reserve policy implications hinge on whether non-Oil prices accelerate, which he judges unlikely.

Oil shock drives US inflation dynamics

"May US headline consumer price inflation is expected to rise as the price of the Iran war is being passed through relatively quickly to consumers."

"A supply shock might have a delayed effect (with profit margins being squeezed), but the very visible cause of price increases and the precedents of the pandemic supply shocks and tariffs make it easier for firms to pass on higher costs without delay (limiting damage to profits, so long as demand does not falter)."

"Demand is not faltering while US consumers use savings to pay the higher oil-impacted prices."

"The policy implications of today’s data depend on whether any prices accelerate for non-oil reasons (probably not)."

"The political implications are already visible, and have probably shaped tariff policy (and may influence US policy in the Gulf)."

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