Last week, I took this picture after filling my truck up with gas (of course I live in Texas and have a pickup truck!). My daily commute is not long so I hadn’t filled up in a while, but this really caught my attention. Typically, the $80-90 fill doesn’t even cross my mind, but seeing $141.00 on the gas pump caused me to pause and think back to my days commuting to and from the Galleria at 48 miles each way. Nationally, the price at the pump is now $4.53 vs. $2.83 at the start of the year, a 60% increase! These higher costs will cause consumers to feel inflation again, and they will not go down anytime soon. The conflict with Iran has affected some of the refineries and production facilities in the Middle East region that will influence global energy prices. Even if the Strait of Hormuz was fully open today it would take a while for energy prices to come back down.
Here are some of the implications of higher for longer energy prices.
First, inflation is going back up. During past spikes in oil of this magnitude, there was a high correlation between inflation and oil. There is an embedded cost in everything we consume, wear, and purchase because it must be transported. One could argue we are less dependent on oil today because of alternatives but in reality, we are still consuming more oil each and every year. Expect higher inflation numbers in the months ahead, but with the shelter component finally coming down post-Covid, it could be offset a bit.
Second, interest rates will also go higher. Today the 10-year Treasury moved up above 4.5% for the first time since May of last year and the 30-year Treasury is over 5.1%. The new Fed chair was widely expected to lower rates, but with this backdrop of higher inflation there will likely not be any cuts in 2026 and there’s a chance that rates will move higher next to address inflation. Equity markets want lower rates, so expect some volatility this summer as the inflation numbers surprise to upside.
Lastly, fall will bring midterms which have historically added to volatility. The good news is that once the elections are over, the market welcomes the clarity and usually does well. Earnings this year have been stellar, which has pushed the markets to all-time highs again and again. Don’t be surprised to see a pullback here and there over the next few months. Depending on the inflation and interest rates situation above, it might be another great buying opportunity for the long run.