Early summer optimism on inflation and the economy has turned into outright pessimism as tanker crossings through the Strait of Hormuz plunge and oil prices rise.
The Houthis’ efforts to block crossings through Bab-el-Mandeb, at the southern end of the Red Sea, combined with rising shipping costs through the Suez Canal, at the northern end, and around the Horn of Africa are resetting expectations around supply, price and inflation throughout the global economy.
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Recent volatility in energy costs will reverse June’s reductions in inflation as gasoline, diesel, jet fuel and petrochemical feedstock prices rise.
Diesel, for example, has soared to an average of $5.30 per gallon in the United States, which is below the wartime peak of $5.69 but still elevated.
It will all make for tough questions for Federal Reserve Chair Kevin Warsh during his press conference after the FOMC meeting on Wednesday.
Will the Fed stick to its playbook and look through the supply shocks and hold rates steady in September, or will the central bank determine that the price increases are more permanent and lift rates?
One would expect that Warsh will not be able to dismiss such questions with surface-based answers, as has been his practice during his brief tenure as Fed chair.
In our estimation, oil in today’s volatile market should trade between $80 and $90 per barrel. But we think that the June optimism on oil prices was overdone.
Tanker crossings in the Strait of Hormuz will need to increase to offset the supply shock if energy prices are to fall.
Daily crossings have declined to one from the recent peak of 13 on July 6. Last year, they averaged 63.
Warsh has avoided answering tough questions in his first few public appearances. For the sake of his and the Fed’s credibility, one would expect that approach will end at the Fed policy meeting.
