US Inflation 'Easily' Gets to 3% on Oil Shock Alone, Says Jordan Rochester

Jordan Rochester, Head of FICC Strategy at Mizuho EMEA, discusses the path ahead for US inflation and economic growth as the war in Iran continues on.

The International Monetary Fund warned that the US-Israeli war against Iran threatens a “global, yet asymmetric” shock, dimming the outlook for economies that were just recovering from previous crises.

Countries in Africa and Asia that are heavily dependent on oil imports are already finding it increasingly hard to access needed supplies, “even at inflated prices,” the world’s financial firefighter said in a blog post published on Monday.

“All roads lead to higher prices and slower growth,” the IMF said. The ultimate impact on supply chains and infrastructure will depend on whether the conflict proves a short or long one, the fund said, adding that “the world may settle somewhere in between — tensions linger, energy stays costly, and inflation proves hard to tame — with ongoing uncertainty and geopolitical risk.”

Brent crude surged toward $115 a barrel in Monday trading, on track for a record monthly increase, as US troops arrive in the region. President Donald Trump repeated his threats to destroy Iranian energy assets if the Strait of Hormuz isn’t reopened soon, raising fears of a further escalation in the war that started on Feb. 28 when the US and Israel attacked Iran.

Beyond the energy disruption, higher food and fertilizer prices are affecting some countries from the Middle East to Latin America, with low-income economies at risk of food insecurity, the IMF warned. The interruption of crop-nutrient supplies from the Gulf comes just as planting season begins in the northern hemisphere, threatening harvests through the year. Federal Reserve Chair Jerome Powell said longer-term inflation expectations appear to be in check but that the central bank is carefully monitoring them as it assesses the effect from the US and Israel’s war against Iran.

Inflation expectations seem to be “well anchored beyond the short term,” Powell said Monday during an event at Harvard University in Cambridge, Massachusetts. He added that officials may need to respond to the impact from the conflict, but that it’s not the case yet. “We don’t know what the economic effects will be,” he said. “We do think our policy is in a good place for us to wait and see,” he added.

Oil prices have jumped significantly since the war started a month ago, which could stoke inflationary pressures while also weighing on consumer demand and economic growth. Such a scenario would pose challenges for the Fed’s policymaking, since the central bank aims to foster both maximum employment and stable inflation.

“The tendency is to look through any kind of a supply shock but a critical essential aspect of that is you have to carefully monitor inflation expectations,” Powell said. Treasuries rallied after his remarks and stocks were higher.

Fed policymakers noted heightened economic uncertainty when they held interest rates steady earlier this month for a second straight time. Following that decision, Powell emphasized the need to see more evidence inflation is moving toward their 2% goal before policymakers would consider cutting rates again.

Private Credit

In recent weeks, jitters in the private-credit space have spooked investors about the sector, leading some investors to demand early withdrawals. Some private-credit funds have also blocked investors from pulling money out.

Asked about the turmoil, Powell said “we’re watching it super carefully” and that a correction is happening in the space.

“I’m reluctant to say anything that suggests that we’re dismissive of the risk, but we’re looking for connections to the banking system and things that might you know, result in contagion.” he said. “We don’t see those right now.”

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