The strikes by the United States and Israel against Iran have pushed up oil prices, bringing the recently alleviated inflation pressure in the U.S. back into market focus. If the oil price shock evolves into a sustained supply disruption, the decline in inflation may be hindered, and the Federal Reserve's room for interest rate cuts will also narrow.
On March 3, Brent crude oil hit $85 per barrel for the first time since July 2024, rising 9% in a single day. Diesel and gasoline futures also moved upward. Previously, U.S. consumers were able to rely on relatively cheap gasoline to cushion the impact of strong &#34;sticky&#34; costs in food and other areas, but this support is being weakened.
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In terms of inflation, the U.S. CPI rose 2.4% year-on-year in January, cooling from 2.7% in December, partly due to a 7.5% year-on-year decline in gasoline prices. However, if crude oil prices continue to rise, gasoline prices may transmit to end consumers within weeks, further raising transportation and airfare costs, expanding the impact on overall price levels.
Neil Shearing, Chief Economist at Capital Economics, estimates that if oil prices remain at $100 per barrel for an extended period, overall inflation could rise by about 0.7 percentage points. For investors, the key variable is the &#34;intensity and duration&#34; of the shock. JPMorgan CEO Jamie Dimon stated on CNBC that as long as the strikes do not drag on, the inflation impact will not be significant. Trump mentioned on Monday that U.S. actions in Iran are expected to last four to five weeks, &#34;but we have the capability to sustain it longer.&#34;
<h2>How Oil Prices Transmit to Inflation: Gas Stations, Transportation Costs, and Airfare Prices</h2>
Gasoline prices have a high correlation with inflation due to the short transmission chain, frequent price updates, and intense competition. The U.S. Energy Information Administration points out that crude oil prices are the largest single factor determining gas station prices in the U.S.
An empirical rule commonly used in economics is that a 5% increase in oil prices will raise the year-on-year inflation indicator by about 0.1 percentage points. While this may seem limited in a single instance, it can visibly elevate prices when accumulated over time.
Rising oil prices will also spill over into other categories. Increased costs for trucking food and other goods, along with higher aviation fuel prices, will also push up airfare prices, thereby expanding the impact on overall inflation.
<h2>Two Scenarios: Limited Impact from Short-Term Disruptions, Sustained Increases Raise Inflation &#34;Steps&#34;</h2>
Many economists believe that if the energy market disruption is brief, inflation may only be elevated for one to two months. The 12-day conflict between Iran and Israel last year briefly pushed oil prices up by about $10 at its peak, and energy infrastructure was largely unaffected, resulting in a short-cycle impact on prices.
At the same time, gasoline does not constitute a large share of household consumption. According to the latest government inflation report, gasoline accounted for only about 3% of average consumer spending in December, while food accounted for about 13%, and housing costs exceeded one-third. This means that unless the increase in oil prices is large and sustained, gasoline alone is insufficient to &#34;dominate&#34; inflation in the long term
But more severe scenarios are still being priced in. Harvard Business School economist Alberto Cavallo pointed out that if the Iran conflict leads to sustained increases in oil prices, its effects could be reflected at gas stations within weeks and raise overall inflation.
Capital Economics Chief Economist Neil Shearing estimates that if oil prices rise to $100 per barrel for an extended period, it could increase overall inflation by about 0.7 percentage points.
<h2>Can the Federal Reserve still cut interest rates: Higher thresholds due to energy shocks combined with existing price pressures</h2>
In a scenario where the inflation path is upward, it may be more difficult for the Federal Reserve to &#34;ignore&#34; the upward risks posed by energy. Neil Shearing believes that if inflation rises significantly due to oil prices, the Federal Reserve will be &#34;less willing&#34; to lower short-term interest rates.
The policy background is not solely a single variable of &#34;energy.&#34; This year, as the labor market stabilizes and some price pressures remain stubborn, the reasons supporting further easing by the Federal Reserve have been diminishing.
If potential energy shocks are compounded by the lingering effects of last year's tariff increases still being transmitted through the price chain, the Federal Reserve's attitude towards interest rate cuts may become more cautious.
Although the Federal Reserve often views energy shocks as short-term disturbances and tends to &#34;ride them out&#34; rather than react immediately, one of the key premises supporting its three interest rate cuts from September to December was an improvement in inflation in the short term. If oil prices push inflation higher again, it will directly raise the threshold for continuing to cut interest rates

The escalation of the US-Iran conflict has pushed Brent crude oil prices above $85, reigniting risks of energy inflation. The surge in oil prices is being transmitted to end prices through transportation and fuel chains, and if it remains at high levels, it could cause overall inflation to jump by 0.7 percentage points. Under this pressure, traders are betting that the probability of the Federal Reserve cutting interest rates twice this year has dropped to 50%, significantly raising the threshold for rate cuts

- Rising oil prices, driven by U.S. and Israeli actions against Iran, have rekindled inflation concerns in the U.S. market.  
- Brent crude oil recently hit $85 per barrel, with predictions that sustained price increases could elevate overall inflation by approximately 0.7 percentage points.  
- The Federal Reserve may face challenges in lowering interest rates if inflation continues to rise due to energy price pressures, complicating its policy decisions.

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The US-Iran conflict reignites "inflation concerns": A surge in oil prices could raise the US inflation rate by 0.7%. Can the Federal Reserve still cut interest rates?