The sharp rise in oil prices triggered by the Middle East situation is reshaping market expectations for U.S. inflation trends. Although most analysts believe that sustained shocks are the real threat, the short-term upward pressure on energy prices is almost certain to be reflected in March data.
According to Wind Trading Desk, Citigroup released a report on March 9 indicating that as of March 8, the average retail gasoline price in the U.S. had increased by about 17% compared to the end of February. Based on this, Citigroup set the average monthly increase in gasoline prices for March at about 15%, which is expected to raise the overall CPI energy component by about 7% month-on-month.
The lagging effects of airfares and core goods will reflect the second wave of inflationary impact from oil prices in the second quarter. Citigroup expects airfares to rise by about 10% to 15% year-on-year by mid-year, and core goods prices will also face upward risks in the second quarter. At the same time, it predicts a month-on-month increase of 0.23% in core CPI for February and a month-on-month increase of 0.37% in core PCE for January (the inflation risk brought by rising oil prices is not significant in the February data).
Bank of America provides a longer-term historical perspective. According to a research report from Bank of America on March 6, data from the past 50 years shows that only &#34;significant and sustained&#34; surges in oil prices will trigger a lasting inflation cycle. Currently, market expectations for the inflation path are short-term upward and long-term stable.
<h2>Gasoline and Utilities: The Fastest Transmission Channels</h2>
The transmission of rising oil prices to inflation shows a clear sequence over time, with gasoline prices being the most responsive segment.
Citigroup predicts that the overall energy component will increase by about 7% month-on-month in March, which will directly raise the CPI. For utility prices, although natural gas prices have risen due to the Middle East situation, the increase in the U.S. is far less than in Europe.
Historical patterns indicate that the transmission of natural gas prices to the gas utility component of the CPI has about a one-month lag, meaning that related pressures may only appear in the CPI for April.
Bank of America estimates that for every 10% increase in oil prices, PCE inflation will rise by about 10 basis points in the near term, but as high oil prices suppress demand for other goods and services, this effect will gradually dissipate over about a year. The drag on consumer spending is roughly equivalent to the increase in inflation, both around 10 basis points.
<h2>Airfares and Core Goods: The Transmission Chain Extends Deeper</h2>
If oil prices remain high, inflationary pressures will penetrate into core inflation components, with airfare prices being the most sensitive transmission node.
Citigroup's research points out that due to the Middle East situation limiting aviation fuel supply, jet fuel prices have recently surged. Airfare prices typically lag behind jet fuel price trends by 1 to 3 months, and significant increases in airfare will only occur if high jet fuel prices persist for several weeks.
Citigroup has slightly raised its recent airfare price expectations, anticipating that by mid-year, airfare prices will increase by about 10% to 15% year-on-year, while the seasonal price decline in the second quarter may narrow.
Regarding core goods prices, Citigroup believes that under the current limited context of new tariffs, the upward pressure on goods prices was originally expected to weaken in the coming months. However, **the rise in energy prices has significantly increased the risk of further strengthening of goods prices around the second quarter
**
Citigroup stated that if PPI commodity prices continue to grow strongly for another month or two, it is highly likely to prompt an upward adjustment of its core commodity forecasts in CPI and PPI.
<h2>Inflation Expectations: Short End Up, Long End Relatively Stable</h2>
The trend of inflation expectations is crucial for the Federal Reserve's policy judgment. Currently, the market response shows a differentiated pattern of short end rising and long end stable.
Citigroup pointed out that short-term market inflation expectations have risen alongside gasoline prices, and short-term consumer inflation expectations may also rise accordingly. However, the market's 5-year/5-year forward inflation expectations have actually retreated recently, reflecting expectations that economic growth will slow and the labor market will weaken.
Bank of America research also corroborated this judgment. Their analysis shows that over the past 50 years, market inflation expectations have been sensitive to oil prices at high frequencies, but in most oil price surge events, the upward movement of inflation expectations has not been sustained (only a few cases, such as the post-COVID pandemic combined with the Russia-Ukraine conflict and OPEC production cuts in 1999, triggered lasting expectation repricing).
<h2>Long-term Inflation Path: Labor Market is the Key Variable</h2>
Regardless of how this round of oil price shocks ultimately unfolds, both Citigroup and Bank of America emphasize that the state of the labor market is the core constraint determining whether inflation can continue to rise. Citigroup stated that a weak labor market will limit companies' pricing power, making the secondary transmission effect of this round of oil price shocks on core inflation weaker than the inflation cycle following the COVID pandemic.
Their latest forecast shows that the year-on-year increase in core PCE is about 3.0% in the first quarter of this year, gradually falling thereafter, with a potential drop to around 2.4% by the end of 2026. However, this is still above the Federal Reserve's 2% policy target.
In this context, Bank of America believes that the Federal Reserve is likely to maintain a wait-and-see stance in the short term. If the oil price shock is limited in scale and duration (below $100 per barrel and less than six months), the Federal Reserve tends to temporarily ignore fluctuations in energy prices.
However, if the shock continues to strengthen, the risk of stagflation, where inflation coexists with slowing economic growth, will put the Federal Reserve in a dilemma, potentially delaying the interest rate cut window further

Citigroup believes that the impact of oil prices on inflation will have little effect on the February CPI to be released on Wednesday, but will have a significant impact on the March data. It is expected that the average monthly increase in gasoline prices in March will be about 15%, which will lead to a 7% month-on-month increase in the energy component of the March CPI. The lagging effects of airfares and core goods will reflect the second wave of oil price impacts on inflation in the second quarter. However, due to the weakness in the labor market, the current market expectation for inflation is a short-term upward trend and long-term stability

- The recent surge in oil prices due to Middle East tensions is reshaping expectations for U.S. inflation, with energy prices expected to push inflation metrics higher in March.  
- Citigroup forecasts an approximate 15% increase in gasoline prices for the month, likely driving a 7% rise in CPI energy components, while American Airlines tickets may rise 10% to 15% in mid-year due to increased jet fuel costs.  
- Despite these pressures, analysts note that long-term inflation expectations remain stable, with labor market conditions being crucial in determining the persistence of inflationary trends.

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Forget about tomorrow's CPI! The transmission of rising oil prices to U.S. inflation only began to show in March