Hormuz Tensions Send Oil Prices Soaring, Raising Inflation Fears

The global economy is facing renewed pessimism regarding inflation and economic growth due to escalating tensions in the Middle East. The Houthis' efforts to block tanker crossings through Bab-el-Mandeb, combined with rising shipping costs through the Suez Canal and around the Horn of Africa, are leading to higher supply chain disruptions.

The resulting increase in energy prices will likely offset the June reductions in inflation, causing gasoline, diesel, jet fuel, and petrochemical feedstock prices to rise. Diesel has already soared to an average of $5.30 per gallon in the United States, below the wartime peak of $5.69 but still elevated.

Federal Reserve Chair Kevin Warsh will face tough questions during his press conference after the FOMC meeting on Wednesday regarding the Fed's response to these supply shocks. One would expect that Warsh will not be able to dismiss such questions with surface-based answers, as has been his practice during his brief tenure as Fed chair.

The Strait of Hormuz tanker crossings have declined significantly, from a recent peak of 13 on July 6 to just one today. Last year's average was 63 crossings per day.