Oil prices creating difficulties for Fed's inflation goal

Rising oil prices could prove to be one of the biggest challenges to the Fed's inflation rate target. Yahoo Finance Markets Reporter Ines Ferre takes a look at crude oil prices as experts worry about energy costs seeping into core inflation, keeping it elevated for longer.

Video Transcript

[VIDEO LOGO]

RACHELLE AKUFFO: In July, the Federal Reserve raised interest rates for the 11th time since March of 2022. The Fed is expected to hold steady, while watching inflation data, hoping for it to go down to 2%. But with oil prices increasing, hitting those inflation targets might be more difficult than predicted. To talk more about this is "Yahoo Finance's" reporter Ines Ferre. Ines, what are you watching?

INES FERRE: Well, Rachelle, next week, we'll be getting the inflation print for August. Year-over-year inflation is expected to jump to an annualized rate of 3.6% in August versus 3.2% in July. Meanwhile, economists forecast core inflation, which strips out food and energy costs. That will stay unchanged.

Now, the Fed tends to watch core CPI, and that's been on a downward trend. But higher oil costs can still seep into the core. That's through higher diesel, higher gasoline costs, jet fuel prices, all derivatives of crude.

Omair Sharif of Inflation Insights tells "Yahoo Finance," we may see higher restaurant prices and any goods that is moved by trucks, such as furniture and appliances. Even airfares could see a bump this week. United Airlines said that in July, since mid-July, jet fuel prices have climbed over 20%.

Now, the Fed is expected to hold rates steady when it meets later this month. It's still watching that data to make sure that inflation continues to fall. And Wall Street analysts have walked back the possibility of recession, prompting some speculation that the Fed could actually pull off a soft landing.

But economists say, if you throw in the mix the higher oil prices that could pose a problem, there's nothing worse than higher oil prices. It will slow growth, it sucks purchasing power, and it adds to inflation expectations, Rachelle.

RACHELLE AKUFFO: And as you mentioned, they're really seeping into a bit of everything in terms of how we pay for airfare and put gas in our cars as well. So then, what are oil market analysts saying about where prices will go from here?

INES FERRE: Well, let's take a look at where they're at right now. Because we are watching WTI crude that's at $87.61. Brent Crude up above $90 per barrel. I'm going to pull up a year-to-date chart because you can see here, from the end of June into right now, we are seeing this that's up about 25% for both WTI and for crude oil. So an increase of 25% in these prices.

A lot of this has to do with the production cuts that have been announced by OPEC+, Saudi Arabia's unilateral production cuts. And Saudi Arabia analysts are telling me, they want oil prices to be above $80 per barrel. And they will do everything possible to maintain it that way.

So I spoke to one analyst that said to me, look, between now and next summer, you can expect to see these prices elevated. The only thing that would bring down oil prices, though, is if we do see a recession.

RACHELLE AKUFFO: And certainly, seeing that perhaps telegraphed perhaps for 2024. So we'll have to wait and see. Ines Ferre, I appreciate you breaking all that down for us. Thanks so much.