It is the classic chicken-and-egg problem. However, the answer, to some extent, is irrelevant. What matters is the close relationship between U.S. inflation and retail pump prices for both diesel and petrol. Although it is not fixed, the consensus – supported by the accompanying graph – is that one follows the other, especially in turbulent times. And these are hectic times by any measure.

Oil is a key input for energy, transport and manufacturing. When it rallies, the ripple effect is clear: consumer (and producer) prices rise. This is reflected in monthly headline CPI estimates. Elevated consumer prices, in turn, have a secondary impact on the core inflation reading. The core reading strips out energy and food prices. The direct influence is mirrored in retail gasoline and diesel prices. The indirect effect is observed through rising production and transport costs. Oil, therefore, can cause inflation. It is also used as a hedge against rising prices when inflation expectations are elevated. Statistical evidence shows that, historically, energy has generated strong real returns when inflation expectations rise.

With the ongoing conflict in the Middle East – home to more than 20 mbpd of oil production – oil prices jumped considerably in March and April, and consequently, inflationary pressures globally, as well as in the U.S., are expected to reignite. In fact, according to the World Bank, every 10% rise in oil prices, in the case of a supply shock, produces a 0.35 percentage point increase in inflation within a year. The Energy Information Administration (EIA), as illustrated in the chart, foresees a tangible rise in U.S. gasoline and diesel prices throughout May (no doubt subject to upside revisions if the Middle East conflict proves prolonged). Even after next month, neither retail gasoline nor diesel prices are expected to fall below their pre-crisis levels well into 2027.

This will adversely impact a wide range of economic activity, including the trucking and agricultural industries. The knock-on effect will be higher inflation expectations, against which oil has been proving a logical hedge. The latest chapter of the Middle East hostilities may or may not be over in a few weeks; however, the ramifications will be felt long after ships once again sail through the Strait of Hormuz en masse. Before the crisis, due to the perceived swelling of global and regional commercial oil inventories, price rallies presented irresistible chances to short Crude Oil futures in general, and Gasoline and Heating Oil contracts in particular; the opposite is true now. Far-reaching inflationary impacts, precipitated by the unprecedented supply disruption around the Persian Gulf, will make eventual dips an attractive buying opportunity for months to come.