Topline
The reopening of the Strait of Hormuz may further “overheat” the economy, potentially resulting in higher inflation and prompting the Federal Reserve to hike interest rates, Apollo’s chief economist warned Wednesday, as consumer prices rose at their highest rate in three years last month amid a surge in energy costs.
“The energy shock is over,” but the “rate shock” isn’t, one economist warned.
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Key Facts
Torsten Slok, Apollo’s chief economist, wrote in a note the “narrative in markets is changing” and that lower oil prices, once viewed as helping alleviate inflation, could increase demand in an “already overheating economy” and produce higher inflation, not lower.
Slok pointed to Consumer Price Index data for April—showing prices rose at a 3.8% annual rate before May’s data indicated costs rose 4.2%, the highest rate since April 2023—and May’s “hot” jobs report, which showed the U.S. added 172,000 nonfarm jobs through the month, as well as a “hawkish” Federal Reserve as driving forces for the narrative shift.
The new narrative “suggests that the reopening of the Strait of Hormuz will further overheat the economy, forcing the Fed to raise interest rates soon,” Slok argued.
Brent Crude, the international oil benchmark, dropped 4.3% to below $74 as of Wednesday morning, its lowest level since before the Iran war.
what to watch for
President Donald Trump, in a Truth Social post, signaled he instructed the Justice Department to look into oil companies for not lowering gas prices despite the drop in crude costs: “The big Oil companies are not dropping their price at the pump commensurate with the sharply lower prices they are paying for Oil,” adding customers are being “gouged.”
big number
More than 11,000. That’s how many seafarers stranded in the Persian Gulf will exit through the Strait of Hormuz after security guarantees were secured, International Maritime Organization Secretary-General Arsenio Dominguez said in a statement.
key background
The U.S. and Iran recently struck an agreement requiring Iran to reopen the Strait of Hormuz, through which roughly one-fifth of the global supply flows. A broadening conflict in the Middle East saw the pathway shuttered, boosting global oil and gas prices while resulting in a surge in inflation in the U.S. The Bureau of Labor Statistics reported earlier this month that its energy index, which tracks shifts in pricing across gas, fuel oil and other energy commodities, accounted for more than 60% of all price increases in May as gas prices jumped nearly 59% annually, the most of any item tracked by the agency. The Federal Reserve, in its latest policymaking decision, noted that inflation “remains elevated” relative to its 2% goal. Central bank officials previously cited an “increased risk” that inflation may take longer to cool than anticipated, with a majority stressing a rate hike may be necessary if higher inflation persisted.