The strike on Iran on Friday, which U.S. officials blamed on Israel, sent oil prices soaring, stoking fears of broader inflation if the Middle East conflict escalates.
Oil prices rose as much as 4% following reports of the attack, before subsequently falling again. But oil is less important to U.S. inflation than robust domestic demand, an economist said Friday.
The U.S. Consumer Price Index, or CPI, rose at a stronger-than-expected rate of 3.5% for the 12 months ending in March – still above the 2% inflation target. of the Fed.
“I think what’s difficult for the Fed right now is actually the part of the CPI that is driven by demand, rather than the supply issues or the energy issues, which are perhaps easier to manage”, Samy Chaar, chief economist at Lombard Odier. , told Bloomberg TV. The Swiss private bank managed 193 billion Swiss francs, or $212.8 billion, in assets at the end of December.
A key inflation measure for the Fed, the personal consumption expenditures price index, was little changed in March from its February reading of 2.8%. Federal Reserve Chairman Jerome Powell highlighted the index earlier this week in signaling that interest rate cuts could come later rather than sooner.
The U.S. economy has been strong, with job growth and retail sales up more than expected for March.
“The problem with the United States is the tricky part that comes from services. Services is demand, and that demand has to come from somewhere — and it’s a robust economy,” Chaar told Bloomberg. An indicator from the Institute for Supply Management showed that the U.S. services sector experienced moderate growth in March.
“Consumers are consuming because they have jobs, because they have rising incomes,” Chaar said.
That means inflation is driven by demand rather than supply for oil, even if a rise in energy prices makes the Fed’s job more difficult, he said.
The Fed is now trying to organize a soft landing for the booming US economy, without tipping it into recession.
“I would say the biggest challenge for the Fed is managing demand from the U.S. economy,” Chaar said. “It’s coming from domestic America, not the Middle East.”
businessinsider
