A research firm details why surging oil prices won't lead to a US inflation nightmare
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- US stocks have dropped and oil prices have spiked in the week since the Iran war kicked off.
- Pantheon Macroeconomics sees gas prices rising to $4 a gallon soon.
- However, the firm said the labor market is too weak to support a sustained rise in inflation.
The US war with Iran has hit stocks as it continues to push oil prices up, threatening to spur higher inflation. However, one economic research firm says fears of a sustained rise in consumer prices tied to rising oil prices are overblown.
Oil prices are up about 50% since mid-February as US and Israeli strikes on Iran have disrupted global oil supplies, with Iran closing the Strait of Hormuz, a critical shipping route for oil and other energy commodities.
As a result, US consumers can soon expect gas prices to rise to around $4 per gallon, up from $3 at the start of March, Pantheon Macroeconomics said in a note to clients on Monday.
Pantheon Macro
Yet any surge in inflation will be short-lived, the firm said, because the US labor market is too weak to sustain a major spike.
"In the near term, the Fed will wait to see if the jump in energy prices has broader consequences for inflation," wrote Samuel Tombs, the chief US economist at the firm. "The risk of second-round effects, however, is low; higher inflation expectations will be meaningless if employers still hold the cards in wage setting and their customers retrench."
The labor market showed fresh signs of deterioration last week, when the Bureau of Labor Statistics said the US economy lost 92,000 jobs in February, badly missing estimates of more than 50,000 new hires.
Tombs said the jobs outlook is likely to get worse in the months ahead, pointing to a few unpromising developments, namely: falling hiring intentions from small businesses; private payrolls, not government, are driving job losses; and weather having little impact on February's negative jobs print.
He said unemployment would rise to around 4.75% this summer, up from current levels of 4.4%.
That would open the door to further rate cuts from the Federal Reserve as it becomes clear that unemployment poses a greater threat than inflation, Tombs said.
"We think the weakening labor market will be the FOMC's main worry by the summer, and still look for 75bp of easing this year," Tombs wrote.