Video | Expert Analysis: Rising Oil Prices May Undermine U.S. Inflation Expectations and Challenge the Federal Reserve

What policy dilemmas does the Federal Reserve face under high oil prices?

As the conflict between the U.S. and Iran approaches a month, shipping through the Strait of Hormuz continues to be obstructed, disrupting the global energy supply system and causing international oil prices to soar. What effects will the rising oil prices triggered by U.S. and Israeli military strikes on Iran have on the United States?

Professor Wan Zhe, an economics expert from Beijing Normal University: First, global inflation is facing a comprehensive rebound, and rising oil prices will be transmitted along the entire supply chain. The costs across all industries, including energy, food, transportation, and chemicals, will surge. Economies heavily reliant on energy imports, such as those in Europe, Japan, and India, will face even greater pressure. The U.S. is a net exporter of energy, but inflationary stickiness may become entrenched, putting the Federal Reserve’s monetary policy in a dilemma. Currently, the average price of gasoline in the U.S. has skyrocketed by over 30% in just three weeks, and high oil prices directly reverse the previous trend of declining inflation, completely shifting market expectations for interest rate cuts. If the high interest rate environment persists longer, it will directly suppress the U.S. real estate market, corporate financing, and stock market valuations. Especially since this year is the U.S. midterm election year, gasoline prices are one of the most sensitive livelihood indicators for American voters. In terms of global economic growth, a slowdown is expected, as high oil prices directly erode disposable income for residents, squeezing non-energy consumption while also increasing production costs for businesses.

The U.S. economy may face stagflation risks.

Professor Wan Zhe, an economics expert from Beijing Normal University: High oil prices may benefit energy companies; however, taking the U.S. as an example, consumer spending is the core engine of the economy. If oil prices continue to stay above $120 per barrel, the drag effect on consumption will outweigh the pull effect from the energy sector. Multiple institutions have already predicted that the probability of a U.S. economic recession is rising, compounded by high inflation, and a typical stagflation pattern may gradually emerge. Additionally, we will also see global monetary policies being forced to shift, further suppressing valuations in global financial markets, leading to increased volatility in the stock and bond markets, and global financial fragility will rise.