Oil Prices Rise but Fed Should Remain Patient

Oil prices surged in September, putting pressure on the economy and inflation. While core inflation has remained stable, hiring has weakened, and wage growth has slowed. The data suggests that higher energy costs are straining economic activity without triggering a self-sustaining inflation cycle, according to The Center Square.

The Federal Reserve should allow time for these adjustments to occur. In March 2025, before the Liberation Day tariff announcement, headline PCE inflation was estimated at 2.3%, with the policy rate at 4.25%, 4.50%. By August, inflation had risen to 3.4%, driven by a 17% year-over-year increase in energy prices, while inflation excluding energy was 2.9%. The bond market has also tightened borrowing conditions, with the two-year Treasury yield at 4.78% and the ten-year yield at 5.24% by October 1.

Businesses are struggling to pass on cost increases to customers, leading to reduced margins, weaker hiring, and delayed price increases. Core PCE prices increased at a 2.1% annualized rate over the three months through August, suggesting no broad acceleration in inflation. The recent oil price increase complicates the economic adjustment, but it does not indicate a second-round effect that would sustain inflation after energy costs stabilize.

The labor market shows no signs of a wage-price spiral, with unemployment stable at 4.2% and hourly wage growth slowing to 3.0% in September. Workers are losing purchasing power rather than winning raises that chase prices higher. The Federal Reserve should remain alert to persistent inflation but has reason to wait based on current data.