How does an oil shock turn into higher rates and falling markets?
Brent crude reached $109.97 a barrel as oil flows through the Strait of Hormuz remained restricted, helping send global bond yields higher and share markets lower.[1] U.S. consumer prices rose 3.4% year over year in August and 0.4% from July, while monthly core inflation accelerated to 0.3%.[2][3] After the report, market-implied odds of a September rate increase climbed from 70% to nearly 90%, and EY-Parthenon switched its forecast to a 25-basis-point hike.[2]
A rate increase would make mortgages, credit cards and auto loans more expensive, even as higher yields improve returns for some savers.[2] The repricing is already affecting portfolios: U.S. equity funds recorded $32.27 billion of net sales in the week through September 9, their largest outflow in nine months.[4]
Key insights
- Gasoline accounted for one-third of August’s monthly CPI increase and was 27.4% more expensive than a year earlier, showing how directly the energy shock has entered headline inflation.[2]
- Core prices rose 0.3% from July after a 0.2% increase the previous month, suggesting price pressure was broadening beyond food and energy.[2]
- August’s inflation data were collected before oil moved above $100 a barrel and diesel exceeded $6 a gallon, so the latest energy surge was not fully captured in the report.[2]
- The repricing extended across markets: Australian bond yields reached a 15-year high, Japan’s Nikkei fell 2.8%, and higher yields supported the dollar.[1]