First Wave of Gulf War Hits CPI

Key Points

• CPI jumped by almost 0.9% in March, fueled by a steep rise in crude oil prices.
• Energy prices jumped 12.6% over the 12 months to March.
• The S&P 500 stalled at 6800.
• University of Michigan consumer sentiment plunged to its lowest level since the late 1970s.

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The first wave of price hikes hit CPI in March, with the index jumping 0.865%, fueled by a steep rise in crude oil prices driven by the war in the Persian Gulf.

Headline CPI growth jumped to 3.3% for the 12 months to March, while core CPI showed a modest increase to 2.6%.

The March increase is the highest since June 2022, shortly after Russia’s full-scale invasion of Ukraine caused similar energy shortages. WTI crude prices peaked at $115 per barrel in June 2022, accompanied by a CPI peak at 9.0%. The rise to $91.38 at the end of March has so far caused a CPI jump to 3.3%, but we expect more to follow.

The first wave of price hike hit consumers at the gas pump:

A 21.2% jump in gasoline prices, the largest since the government started consistently tracking the series in 1967, accounted for nearly three quarters of the monthly ​increase in the CPI. Other motor fuels, which include diesel, also soared by a record 30.8%. (Reuters)

The next wave will likely be seen in airline fares and transportation costs, due to the industries’ short inventory cycles. Airline fares peaked in June 2022, along with crude prices.

The third wave will hit food and commodities as rising diesel prices drive up costs in agriculture, mining, and transportation. Food CPI peaked at 11% in August 2022, two months after the peak in crude prices.

The fourth wave hits the broad manufacturing and services sector with a delay of 3 to 6 months. From the earnings call of American lubricants manufacturer WD-40:

“Subsequent to our quarter end, recent geopolitical developments in the Middle East have contributed to the increased costs of certain petroleum based specialty chemicals and other input costs, which will impact our cost of products sold.  There is typically a delay of between 90 and 120 days before changes in cost of raw materials impact our cost of products sold, due to production and inventory lifecycles.”

Consumers

Consumer sentiment plunged to its lowest level since the late 1970s, according to the University of Michigan’s April survey.

The Index of Current Economic Conditions fell to its lowest level since the survey started in 1960.

Expected price changes over the next year jumped to 4.8% as consumers brace for the impact of crude oil shortages.

Financial Markets

10-year Treasury yields edged up to 4.32%.

The S&P 500 rally stalled at 6800, and we expect a retracement to test the former primary support level at 6550.

The US Dollar Index followed through below 99, suggesting a decline to test primary support at 96.

Gold, however, remains flat at $4,750 per ounce. We expect the metal to remain rangebound while the Strait of Hormuz is closed, throttling export revenues of Persian Gulf states.

Energy

Brent crude June’26 futures sit at $95 per barrel, while spot prices at $132 highlight the current physical shortage.

Ole Hansen, Head of Commodity Strategy at Saxo Bank:

North Sea crude prices for immediate delivery continue to highlight mounting stress in the physical market, as European and Asian refiners scramble to secure cargoes to replace volumes lost during the month-long blockade of the Strait of Hormuz.

Dated Brent—a key benchmark for physical North Sea shipments—has moved sharply into focus given the signal it provides on overall market tightness. It rose 7% yesterday to USD 132, while the June Brent futures contract lingered around USD 95, underscoring the growing dislocation between prompt supply and forward pricing.

Data from LSEG, cited by the Financial Times, show Forties Blend—another marker for immediate delivery—trading close to USD 147 per barrel on Thursday, further highlighting the acute strain in spot markets.

The Dow Jones Global Oil & Gas Index is testing support at 600 on the weekly chart below. The uptrend is intact, and respect of support would signal another strong advance.

Uranium

Sprott Uranium Miners ETF¹ (URNM) broke secondary support at 65 on the weekly chart below. However, narrow consolidation signals accumulation, and a recovery above 65 would signal another advance.

Base Metals

Copper broke secondary resistance at $12,500 per tonne, weakening the downtrend. However, this is not yet a reversal.

Sprott Copper Miners ETF¹ (COPP) is similarly testing resistance at 40. A breakout above 45 would confirm a fresh advance.

The Aluminium uptrend is far stronger, due to shortages caused by damage to smelters in the Persian Gulf. A follow-through above $3,600 per tonne would signal another advance.

Lithium

Sprott Lithium Miners ETF¹ (LITP) is testing secondary resistance at 14, but would require a breakout above 16 to confirm another advance.

Critical Minerals

Sprott Critical Materials ETF¹ (SETM) similarly shows a breakout above 34, but needs a breakout above 40 to confirm a fresh advance.

Conclusion

CPI jumped by 0.865% in March, the largest increase since June 2022, shortly after Russia’s full-scale invasion of Ukraine. This is merely the first wave of price increases, with annual CPI jumping to 3.3% due to a sharp rise in gasoline prices. We expect further waves of price increases as the impact of higher fuel prices filters through the economy.

The S&P 500 rally has stalled and will likely retest support at 6550. We expect 10-year Treasury yields to rise and the Dollar to weaken. However, Gold will likely remain rangebound until Iran’s chokehold on the Strait of Hormuz is removed.

We expect crude oil prices to remain high, with the uptrend in oil and gas stocks likely to continue. Coal and lithium miners may derive secondary benefits from the energy shortage, while aluminum is riding high due to shortages caused by Iranian attacks on Persian Gulf smelters.

Plunging consumer sentiment warns of a likely US recession, with the University of Michigan index at its lowest level since the late 1970s. A record low on the Current Economic Conditions index signals a likely Republican wipeout in the November midterm elections, with the party losing control of the House. President Trump would complete his term as a lame-duck president, offering financial markets some respite, but the House is probably too divided to govern from the center.

Acknowledgments

• Federal Reserve of St Louis: FRED Data
• Peter Boockvar: Adding what WD-40 said
• Ole S Hansen: Brent Spot Price, on X
• University of Michigan: Consumer Surveys
• Wolf Richter: First Wave of Energy Price Spikes Hit CPI Inflation
• Reuters: US consumer inflation hot in March amid record surge in gasoline prices

Notes

1. We analyze exchange-traded funds (ETFs) to determine market sentiment towards a specific sector, industry, or commodity. The analysis is not a recommendation to buy or sell, nor is it a commentary on the merits of the particular ETF.