War in the Middle East starts to show up in inflation data

It’s going to be a big week for inflation data, starting at the gas pump, where the average price per gallon edged up to $4.12 on Monday. That’s more than a dollar higher than it was five weeks ago, when the U.S. and Israel launched a war against Iran. Diesel is up even more, to $5.62 a gallon.

Those growing gas and diesel prices — driven by higher global oil prices — are beginning to flow into other economic data.

The latest Institute for Supply Management’s Purchasing Managers Index showed that the prices businesses pay for what they need shot up 7.7 percentage points in March, to the highest level since October 2022.

That service industry report followed one on the manufacturing sector, which came out last week.

Dan North, senior economist at credit insurer Allianz Trade, said these private sector ISM reports are really important for gauging inflationary pressures in near-real time.

“It is the most up-to-date data. The government data such as [consumer price index] is at least a month behind,” he said.

And what does the ISM data show?

“Prices have gone up pretty sharply, especially in manufacturing, up 19% in two months,” North said.

Jay Hatfield, CEO of Infrastructure Capital Advisors, explained the mechanism: “Increases in oil prices translate into increases in gasoline, but also importantly diesel. Because diesel prices really filter into everything.”

It’s what Hatfield calls the “bleed-through effect,” as the cost of producing goods — and moving goods and people — goes up.

“Food is about 40% energy, but it also shows up in airline prices, transportation because of the diesel increase,” he said.

Surcharges for diesel-fuel are now being passed along the supply chain to businesses, and ultimately consumers.

It’s not only oil prices driving higher inflation, said Mark Zandi, chief economist at Moody’s Analytics. “There’s a bunch of stuff juicing up inflationary pressures. Obviously there’s the tariffs, that continues to pass through, that’s not over.”

But that’s been a slow burn, as businesses held off on raising prices amid policy uncertainty.

The inflationary effect of higher crude oil prices has been almost immediate. Zandi said based on all the currently available data, it looks like inflation is 3% year-over-year. (The consumer price index for March and the personal consumption expenditures price index for February, out later this week, will give more information.)

“Just for context, the Federal Reserve wants 2%. Even if the war in the Middle East came to an end relatively soon, by this summer we’re looking at 3.5 to 4. So I’d — I’d buckle up,” he said.

That bumpy ride may mean no Fed rate cuts on the horizon this year.