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Is Oil Behind the Rise of US Inflation?

Miguel A. Rodriguez
Miguel A. Rodriguez
13 October 2023

The US Consumer Price Index (CPI) for September rose 0.4%, opposed to the expected 0.3%. This shows that inflation is still high, mostly due to the price of oil. As inflation is still far from the Federal Reserve’s (Fed) target of 2%, speculations about another rate hike this year could be in the cards brought stocks down and the market interest rate up. 

US CPI rose slightly for September

The release of consumer price data on Thursday, which could have an impact on the Fed's next monetary policy decisions, caused the US stock market to decline after four days of gains.  

US consumer prices rose slightly more than expected in September, with the monthly figure rising 0.4%, rather than the expected 0.3%. Even so, this still represented a drop from 0. 6% in August. In annual terms, the CPI remained unchanged at 3.7%.

The closely watched core figure, which includes volatile categories like food and energy, came in at 0.3% month over month, as expected, and was down from 4.3% year over year to 4.1% this month.

While the headline figure was slightly higher than expected, there was some concern about a potential rebound given that producer prices released on Wednesday were higher than expected.

Market interest rates rose as inflation is still high

Market interest rates (treasury bond yield) increased by several basis points. The 10-year bond rose to 4.64% after several days of falls due to bond purchases in search of safe haven assets as a result of geopolitical tension in Israel.

Although the CPI figure was slightly above expectations, inflation is not showing signs of a significant decline that could lead the Fed to ease monetary policy. It is this factor that caused the stock market to experience a slight decline and the US Dollar to strengthen against all its peers as it is positively correlated with interest rates.

Oil is one of the main assets driving up inflation

Oil is a key asset when it comes to inflation.  

Oil has marginally corrected downward after the bullish recovery that occurred after the beginning of the hostilities in Israel due to concerns that the conflict would spread to the Middle East oil-producing nations.

This sudden stop in the rise of crude oil was due to the report released by the International Energy Agency (IEA). The report showed that the agency lowered its global oil demand growth forecast for 2024 due to a weaker economic outlook.

The IEA also noted in the report that the voluntary cuts by OPEC+ are the only thing now keeping the oil market in deficit (more demand than supply). If these cuts are reversed, this could probably mean more oil in the market in January of next year, which would put downward pressure on the price.  

As a result, it can be said that the price of crude oil is now stable despite upward pressure caused by the possibility of a rise in geopolitical tension and downward pressure brought on by the likelihood of a decline in future demand.  

Even so, there is still a chance that Middle Eastern tensions may escalate. This could trigger a significant positive reaction and push WTI oil prices up to around $100 per barrel, according to some sector analysts.

Oil graph 13.10.2023.png

Oil monthly chart, October 13, 2023. Source: WebTrader.

Key Takeaways

  • CPI showed a monthly rise of 0.4%, opposed to the expected 0.3%.
  • Market interest rates rose by several basis points.
  • The 10-year bond rose to 4.64% after falling for several days.
  • Markets are concerned that inflation is showing no signs of dropping.
  • Suspicions that the Fed may hike rates again are mounting.
  • The stock market declined while the US Dollar strengthened.
  • Oil marginally corrected downward after the release of the IEA report.
  • The IEA lowered its global oil demand growth forecast for 2024.
  • Due to this, the price of oil could be considered to be stable.
  • Markets are still monitoring the situation in Israel, as the tension could escalate.  

Related Articles:

  • Commodity Trading and Investing
  • Oil ETFs

Sources: Bloomberg, Reuters 






Miguel A. Rodriguez
Miguel A. Rodriguez

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.