Oil Prices Are Near $100 Again. Here's How Higher Fuel Costs Could Flow Into Inflation Data.
Key Points
Geopolitical conflict in the Middle East has driven up oil and natural gas prices.
Consumers will feel the pinch at the pump, but higher energy prices will eventually show up elsewhere as well.
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The geopolitical conflict in the Middle East has led to a somewhat predictable rise in oil and natural gas prices. With key energy shipping routes disrupted, there are even talks of releasing oil and natural gas from strategic energy reserves to stem the rise. You will start to see the impact of rising oil and natural gas prices fairly quickly, but the lingering impact could be even bigger.
The first place is the pump
Oil is used to create gasoline, and when you go to fill up your car, you will start seeing the impact of rising oil prices. This happens fairly quickly, which you likely already know because the price of gasoline changes daily and, sometimes, even more often. The price of gasoline is one of the most volatile components of inflation.
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Historically, Motley Fool research shows that inflation averages around 3.8% per year. However, inflation has risen well beyond that at times, hitting more than 20% in 1920. This is important because high inflation tends to be bad for the market, with inflation over 5% associated with S&P 500 index (SNPINDEX: ^GSPC) returns averaging around 2.4%.
High energy prices hit in other ways, too
But don't think you can avoid rising energy prices because you drive an electric vehicle. Natural gas is an increasingly important fuel for electric utilities. As the price of natural gas rises, the risk of higher electricity prices rises with it.
That isn't where the risk ends, either. The things you buy every day, or even just occasionally, all need to be moved from where they are made to where they are sold in order for you to buy them. Transportation costs rise as energy prices rise. Those costs will eventually flow into the price of the products you buy. That will likely have a delayed impact, but it will eventually lead to higher inflation.
Brent Crude Oil Wholesale Spot Petroleum Price data by YCharts
Going a step further back in the supply chain, chemicals and other products made from oil and natural gas are also an important part of the manufacturing process for many things. Even things like lubricants for manufacturing equipment need to be considered here. Higher input costs will eventually get passed on to buyers, as well.
The inflation impact could linger
Even after oil and natural gas prices fall, it will take time for the cost increases you see to recede because of the time required to move and process these commodities. So, inflation could be impacted for longer than you might expect from even a relatively short period of higher energy prices. And if elevated energy prices linger, the impact could be material.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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