Category: Inflation

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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.
  • A 21.2% jump in gasoline prices accounted for nearly three quarters of the monthly ​CPI increase.
  • We expect further waves as rising costs reach agriculture, mining, and transportation before filtering through to the broader economy.
  • The S&P 500 stalled at 6800.
  • University of Michigan consumer sentiment plunged to its lowest level since the late 1970s.

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.
CPI & Core CPI - Monthly

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Ceasefire Falls Apart

Key Points

  • Israel stepped up airstrikes on Hezbollah targets in Lebanon.
  • Iran’s lead negotiator says a bilateral ceasefire is unreasonable in such a situation.
  • Iran attacked Saudi Arabia’s East-West Pipeline, which bypasses the Strait of Hormuz, just hours after the ceasefire ‌was agreed.
  • The United Arab Emirates carried out air strikes on Iranian production and refining facilities. Iran retaliates with a barrage of missiles and drones.
  • Ukraine defies calls to stop striking Russian energy facilities.
  • Brent crude bids for spot delivery at $144 per barrel, but no sellers.
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Australian PMI Dives to Recession Levels

Key Points

  • The S&P Global Australia Composite PMI dived to 46.6 in March, from 52.4 in February.

The S&P Global Australia Composite PMI dived to 46.6 in March, from 52.4 in February. The fall below 49.0 marks our first recession warning since December 2023.

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Brent Crude Spot at $141 per barrel

Key Points

  • Brent crude spot prices reached $141.36 per barrel on Thursday.
  • ISM Services PMI declined to 54% in March, reflecting slowing growth.
  • However, the ISM Services Prices index accelerated to 70.7%, warning of an inflation shock.

CNBC reports that Brent crude spot prices reached $141.36 per barrel on Thursday, the highest level since the 2008 financial crisis.

Brent Crude Spot Price

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Jobs Rise but Prices Soar, Growth Slows and Liquidity Tightens

Key Points

  • Non-farm employment jumped by 178,000 in March, well above the expected 60,000.
  • The unemployment rate declined to 4.3%.
  • Growth in aggregate hours worked, however, slowed to 0.4% over the past year.
  • The ISM Manufacturing Prices index jumped to 78.3%, warning of a price shock.
  • Aluminium prices soared to nearly $3,600/tonne due to supply shortages caused by the war in the Persian Gulf.
  • Brent crude closed the week at $109 per barrel, with no end to the Iran war in sight.

The BLS reported a 178,000 increase in non-farm payroll in March, well above the 60,000 forecast. Employment growth has been erratic, averaging less than 15,000 over the past 6 months.

Employment Growth

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Australian CPI Shock Ahead

Key Points

  • The Australian Consumer Price Index (CPI) rose 3.7% for the 12 months to February, down from 3.8% in January 2026.
  • The average wholesale price of diesel jumped to $2.83 per liter by Friday, March 20, compared to $1.62 in February.

The Australian Consumer Price Index (CPI) rose 3.7% for the 12 months to February, down from 3.8% in January 2026, while the Trimmed Mean held steady at 3.7%. While above the RBA’s target of 3.0%, the seasonally adjusted increase of just 0.2% in February offered a glimmer of hope that inflation is easing.

Australian CPI & Trimmed Mean CPI

A breakdown shows that most inflationary pressure comes from non-tradables (5.0%) compared to tradables (1.3%). Tradables are goods and services that are largely influenced by international trade prices, such as auto fuel, most food items, clothing, and footwear. Non-tradables such as household rents, health care, and education are mostly influenced by domestic factors.

Australian CPI: Tradables & Non-Tradables
However, we expect a sharp rise in tradables CPI in March, driven by a massive spike in crude oil prices.

Wholesale diesel prices (TGP) jumped to an average of 283.1 cents per liter by Friday, March 20, compared to an average of 162.3 cents for the week ended February 22—an increase of nearly 75% in just four weeks.

Australian Diesel TGP & Singapore Gasoil

Conclusion

We expect a steep rise in March CPI, which increases the chance of further rate increases from the RBA.

Acknowledgments

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Crude Oil Spikes But Gold Falls

Key Points

  • Iranian missiles damaged Qatar’s Ras Laffan Industrial City, the world’s largest LNG export facility.
  • Brent crude futures spiked to $115 per barrel.
  • The Fed kept the fed funds target rate unchanged at 3.50%-3.75%.
  • Gold is testing support at $4,800 per barrel.

From CNBC:

Qatar said Wednesday that Iranian missiles caused “extensive damage” at Ras Laffan Industrial City, home to the largest liquefied natural gas, or LNG, export facility in the world….

Qatar halted LNG production on March 2 due to Iranian drone strikes at Ras Laffan and Mesaieed Industrial City. The Gulf state is the second-largest LNG exporter in the world, after the US Qatar accounts for nearly 20% of global LNG exports, according to data from energy consulting firm Kpler.

Iran is also attacking oil export facilities outside the Persian Gulf to further restrict global energy supply. From Reuters yesterday:

Omani ​crude – exported from a terminal outside the Strait of Hormuz – is trading at a record premium of $51 a barrel to Brent, compared with an average of just 75 cents in February, pushing the outright price to around $150 a barrel for May ​loading.

A similar pattern is playing out elsewhere. Cash premiums for Dubai crude jumped to $56 a barrel on Monday from an average of 90 cents in February, according to data from S&P Global Platts and Reuters.

The surge reflects the enormous uncertainty over the actual amount of supply available amid repeated Iranian strikes on oil terminals in Oman and at Fujairah, the United Arab Emirates’ main oil-exporting terminal outside Hormuz.

Brent crude futures (ICE May’26) climbed to $115 per barrel.

Brent Crude Futures

Fed Monetary Policy

Meet the new head of monetary policy at the Fed.

Iran's Supreme Leader: Mojtaba Khamenei

Spoiler alert: it’s not Kevin Warsh. Iranian cleric, Mojtaba Khamenei, recently appointed supreme leader of the Islamic state, now dictates global monetary policy.

Iran’s chokehold over Gulf states crude oil and LNG production will dominate global employment, inflation, and liquidity for the foreseeable future.

The Fed was on track for further rate cuts, with financial markets expecting three cuts by year-end as the economy slowed and the labor market shed 92,000 jobs in February.

Employment Growth

However, the attack on Iran has flipped the script. Rising crude oil prices are expected to increase inflationary pressure and restrict the Fed’s ability to cut rates.

Core PCE inflation, the Fed’s preferred measure of underlying inflation, had already increased to 3.1% for the 12 months to January 2026, from 2.6% in April 2025.

PCE & Core PCE

Rising energy prices (LHS) will likely cause a spike in CPI (RHS) similar to the increase in 2021 and ’22.

CPI & CPI Energy

Moody’s Baa corporate bond spread climbed to 1.85% on March 17, warning of tighter liquidity in financial markets.

Moody's Baa Corporate Bond Spread

The S&P 500 retreated to 6,625 following news of renewed Iranian attacks. We expect a test of primary support at 6550.

S&P 500

Copper broke support at $12,500 per tonne, anticipating a contraction in demand as the global economy slows.

Copper

Gold broke support at $5,000 per ounce, finding short-term support at $4,800. Axel Merk attributes the recent sell-off to “deleveraging among speculators, global growth headwinds, and an oversold condition in some markets after a very strong January run-up.”

Spot Gold

However, there was a similar sell-off in March 2020 (below), shortly after the outbreak of the COVID-19 pandemic. A liquidity contraction and the rebalancing of risk-parity funds caused a sell-off across all major asset classes, including stocks, bonds, and precious metals. Gold recovered in April, rallying to $2,050 per ounce by August 2020.

Spot Gold

Gulf states could also be liquidating reserves to support their economies while oil exports are restricted.

The monthly chart below shows the long-term uptrend since March 2024, when gold broke out above resistance at $2,000. We are now witnessing a pull-back to test primary support at $4,500. Respect of support will likely signal another strong advance.

Spot Gold

Conclusion

The Fed is powerless to fight inflation caused by the Iranian chokehold over global energy supplies. They are also constrained in their ability to use monetary policy to support a weak labor market because of the looming threat of inflation.

Our bullish thesis for gold remains. Precarious sovereign debt levels limit governments’ ability to support their economies without fueling inflation. Political leaders are also reluctant to adopt more restrictive fiscal policy because of the impact on their economies. The outcome will likely be prolonged currency debasement through inflation, with gold bullion eventually replacing US Treasuries as the global reserve asset.

Acknowledgments

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Australia Braces for Oil Shortages

Key Points

  • Australia has roughly one month of emergency reserves of petrol, diesel, and gasoline.
  • Iranian attacks will likely lead to supply shortages and steep price hikes in food, commodities, and air travel.

Brent crude futures (May ’26) are testing resistance at $85 per barrel. A breakout will likely offer a short-term target of $90.

Brent Crude

March 5 (Reuters) – More tankers came under attack in Gulf waters on Thursday as the U.S.–Iran war escalated, and Iranian drones entered ​Azerbaijan, threatening to spread the crisis to more oil producers in the region.

A Bahamas-flagged crude oil tanker was targeted by an Iranian ‌remote-controlled boat laden with explosives while anchored near Iraq’s Khor al Zubair port, according to initial assessments. A second tanker at anchor off Kuwait was taking on water and spilling oil after a large explosion on its port side.

Nine vessels have come under attack since the conflict broke out between the U.S., Israel and Iran on Saturday. Iran ​launched a wave of missiles at Israel early on Thursday and also sent drones into Azerbaijan, injuring four people.

….Around 200 ships, including oil and liquefied natural ​gas tankers as well as cargo ships, remained at anchor in open waters off the coast of major Gulf producers, according to Reuters estimates based ​on ship-tracking data from the MarineTraffic platform.

Hundreds of other vessels remained outside the Strait of Hormuz unable to reach ports, shipping data showed.

Australian ​Energy Minister Chris Bowen said on Tuesday that Australia has 36 days of petrol, 34 days of diesel, and 32 days of jet fuel in reserve. While Bowen stressed this was the highest level in more than a decade, it’s far below the International Energy Agency recommendation of 90 days.

Compare that to Japan, which is similarly reliant on crude oil from the Middle East and holds emergency oil reserves equivalent to 254 days of consumption. (Reuters)

Ongoing shortages caused by even partial closure of the Strait of Hormuz could lead to fuel rationing in Australia.

Major industries that are heavily reliant on diesel fuel include long-haul road transport, agriculture, and mining. Iron ore operations in the Pilbara region, a major earner of export revenue, alone consume hundreds of millions of liters of diesel each year. (Reuters)

The aviation industry is also vulnerable to fuel shortages. Jet fuel prices in Asia’s ​trading hub Singapore climbed to $225.44 a barrel on Wednesday, a record high.

The spot price of jet kerosene has now gained 140% since the close of $93.45 a barrel on February 27, the day before the United States and Israel launched an aerial bombing campaign against Iran.

The problem is that much of the oil shipped through the Strait of Hormuz is medium-sour crude, a grade prized for its higher yield of middle distillates such as jet kerosene and diesel.

Even if refiners can source alternative crudes from Africa or South America, these grades tend to be lighter and yield more light distillates such as gasoline and naphtha. (Reuters)

The Dow Jones Global Oil & Gas Index has climbed 20% since mid-January.

Dow Jones Global Oil & Gas Index

Conclusion

Japan and China have large emergency stockpiles of crude and LNG and can probably survive several months of supply interruptions.

India, Australia, and Europe do not have that luxury and will likely suffer from a steep spike in prices and possible fuel rationing if the Strait of Hormuz remains closed.

In Australia, we expect food prices to jump if the price of diesel, used in agriculture and long-haul freight, rises. Mining costs will also likely rise due to diesel shortages, driving up the cost of materials.

Global aviation is also vulnerable because of the steep rise in jet fuel prices.

Acknowledgments

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Japan’s Debt Trap

Key Points

  • Japanese PM Sanae Takaichi led her Liberal Democratic Party to a resounding 316 out of 465 seats win in Sunday’s snap election for Japan’s lower house.
  • The Yen strengthened, and long-term bond yields declined on the result.
  • The Japanese government is in a debt trap caused by precarious debt levels, negative real interest rates, a weakening Yen, and rising inflation.

Japanese Prime Minister Sanae Takaichi delivered the country’s first post-war supermajority in Sunday’s snap election. Her Liberal Democratic Party won 316 out of 465 seats in Japan’s powerful lower house.

The arch-conservative leader has pledged to suspend the 8% sales tax on food, called for a return to the large-scale fiscal stimulus deployed by former Prime Minister Shinzo Abe (2006-2007 and 2012-2020), and wants to revise Japan’s pacifist constitution. (Reuters)

The Japanese Yen strengthened against the Dollar, but remains in a long-term downtrend. The Yen has weakened considerably since Takaichi’s appointment in October 2025. However, currency markets hope that Takaichi’s resounding victory will ease pressure to adopt populist policies.

Japanese Yen

Japan has struggled to recover since industrial production plateaued in the 1990s.

Japanese Industrial Production

Japanese fiscal debt ballooned as the government ran large deficits to stimulate the economy. Now, fears of rising inflation have driven up long-term interest rates, threatening a fiscal crisis as debt-servicing costs rise.

Japanese Fiscal Debt to GDP

Takaichi seeks to follow a fiscal path similar to that of Japan’s longest-serving prime minister, Shinzo Abe, with large-scale fiscal stimulus now known as “Abenomics.” However, inflation is much higher than during Abe’s tenure, which ended in 2020. Japanese core CPI excluding food and energy (termed “core core” in Japan), remains stubbornly high at 2.9%.

Japanese CPI Inflation Excluding Food & Energy

The Bank of Japan has slow-walked the pace of increases in its policy rate, which remains deeply negative at -2.15% (0.75% minus 2.9%), heightening fears of high inflation.

Bank of Japan Policy Rate

Rising Japanese interest rates, accompanied by a weakening Yen, have alerted bond markets to a potential fiscal crisis. Rising rates typically strengthen the domestic currency by attracting inflows of foreign capital. The weakening Yen warns of the opposite: capital outflows despite higher interest rates, as bond markets are wary of inflation risk.

Bond markets are demanding increased compensation for inflation risk, with the 30-year Japanese bond yield climbing above 3.75% before retracing to test support at 3.5% after the snap election result.

30-Year JGB Yield

Japanese stocks have also soared on expectations of higher inflation, with the Nikkei 225 index in a strong uptrend.

Nikkei 225 Index

Conclusion

Japanese Prime Minister Sanae Takaich’s resounding victory in Sunday’s snap election provides her with the political cover needed to make the tough decisions necessary to avoid a fiscal crisis. Whether she is sufficiently pragmatic to seize this opportunity will become evident in the months ahead.

Japan is in a debt trap.

The pursuit of large fiscal stimulus risks a budgetary crisis as higher inflation drives up bond yields, threatening a budget blowout. Intervention by the Bank of Japan to suppress long-term interest rates through large bond purchases would risk a currency crisis, with a collapse of the Yen.

Japan’s long-term bond yields are artificially low, supported by the Bank of Japan’s large-scale bond purchases. The chart below from Robin Brooks compares JGB 30-year yields (JP) with the yield on Germany’s 30-year Bund (DE). Both bonds offer similar yields despite substantial differences in the two countries’ debt-to-GDP ratios.

30-Year JGB Yield vs. German 30-Year Yield

We expect that the Yen will continue to weaken until the above disparity is rectified, with capital flowing out of Japan into more secure markets.

A weak Yen, or higher Japanese interest rates, has far-reaching implications beyond Japan’s domestic bond market. Japanese investors hold $11 trillion of international investments. Rising domestic interest rates, a falling Yen, or attempts to support the Yen by selling reserve assets — can destabilize international capital markets, driving up long-term bond yields.

Acknowledgments

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RBA Admits Its Mistake

Key Points

  • The RBA raised its cash rate target by 25 basis points to 3.85%.
  • The consumer price index jumped to 3.8% for the 12 months to December 2025.
  • The unemployment rate fell to a seasonally-adjusted 4.1%.
  • The ASX 200 found support at 8800.

The RBA increased its cash rate target by 25 basis points to 3.85%, citing stubborn inflationary pressures and a labor market that is “a little tight.”

The trimmed mean, the RBA’s preferred measure of underlying inflation, increased slightly to 3.3% for the 12 months to December 2025, up from 3.2% in November. However, a jump in the consumer price index to 3.8% from 3.4% in November spooked the central bank into a speedy reversal of its recent accommodative monetary policy.

Australian CPI & Trimmed Mean CPI

The 0.25% rate increase comes less than 12 months after the RBA commenced rate cuts on 19 February last year. The cumulative 75-basis-point rate-cut cycle is the shallowest in the past 35 years, an acknowledgment that it cut too soon.

RBA Cash Rate Target

The seasonally adjusted unemployment rate fell to 4.1% in December from 4.3% in November, indicating a tighter labor market.

Australia: Unemployment

The S&P Global Composite PMI for Australia jumped to 55.7 in January 2025, the highest level in more than 3 years.

S&P Global Composite PMI

Also, the ANZ-Indeed job ads average increased to 4.4% in January 2026, but remains in a long-term downtrend.

Australia: Job Ads

However, aggregate monthly hours worked grew by 1% over the 12 months to December 2025, suggesting low real GDP growth in the year ahead.

Australia: Aggregate Hours Worked

Over the same 12 months, credit and broad money grew at rates of 7.6% and 7.2%, respectively. The wide margin of more than 6.0% between credit/money growth and actual hours worked suggests strong underlying inflationary pressures.

Australia: Credit and Broad Money Growth

The ASX 200 shrugged off the rate increase, respect of support at 8800 signaling another test of 9000.

ASX 200 Index

The large ASX 200 Financials index indicates increased buyer interest, with a higher Trend Index trough.

ASX 200 Financials Index

The ASX 300 Metals & Mining index continues in a strong uptrend, and recovery above 8000 would indicate a fresh advance, with a short-term target of 8750.

ASX 300 Metals & Mining Index

Conclusion

The RBA faces a dilemma.

On the one hand, economic growth is slowing. Aggregate monthly hours worked grew just 1.0% in 2025, while real GDP growth slowed to 0.4% in the third quarter.

Australian Real GDP Growth

On the other hand, inflation is rising due to high government spending, loose monetary policy, and high immigration, crush-loading the housing rental market.

Hiking rates will further slow the economy, but the central bank is already late in tightening monetary policy and will need to hike aggressively to bring inflation back under control.

For now, the stock market shrugged off the rate increase. However, the RBA will need to inflict some pain to achieve its goal.

Acknowledgments

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