Oil Tops $104 as Fed Hike Odds Rise
Brent crude breached $104 this week, pressuring equities and raising the likelihood of a Federal Reserve interest rate increase next week.
Brent crude traded above $104 by Friday afternoon. The price jump followed a near double-digit weekly increase in oil costs. Shipping traffic in the Strait of Hormuz slowed during the period. Wall Street responded to the energy spike with broad selling. The Dow Jones Industrial Average lost 848 points for the week. The S&P 500 declined by 62 points. The Nasdaq index fell 173 points.
Inflation data confirmed the pressure on prices. The consumer price index rose 0.4% last month. Annualized inflation reached 3.4%. The producer price index also increased by 0.4% in August. Energy costs drove the bulk of these increases. Energy prices rose 4.2% last month. This marked the largest monthly gain since May.
Energy costs drive sector inflation
Specific sectors show clear price increases. Airline fares rose 2.7% since July. Fares are up nearly 24% from a year ago. Restaurant spending increased 3.4% year-over-year. Diesel prices impact food inflation significantly. Most farming equipment and transport rely on diesel. Food prices can lag diesel costs by up to nine months. Transportation, warehousing, and food sectors face continued pressure.
Fed hike probability increases
Analysts expect the Federal Reserve to raise rates next week. Some experts predict a hike of 75 basis points. The European Central Bank already raised rates this year. The Fed meets next week to decide on its own policy. Inflation remains the primary driver for this decision. Market participants anticipate tighter monetary policy.
Consumer and business sentiment declines
Consumer optimism is fading. The University of Michigan’s September preliminary index dropped. Sentiment fell among low- and middle-income households. Small business confidence also dipped slightly. The National Federation of Independent Business index remains near its high point. Inflation is the largest reported problem for businesses. 62% of respondents cited supply chain disruptions. Sales worsened in August. Uncertainty remains elevated among small business owners.
