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Fed inflation framework doubts grow as oil and energy stay high

Commerzbank warned that persistent oil and energy prices could make second-round inflation effects more likely and complicate the Fed’s path, weighing on the US dollar.

Reported · Written up by our desk · Major Pairs

Commerzbank’s Volkmar Baur said persistent high oil and energy prices could complicate the Federal Reserve’s inflation stance, even as markets only modestly price in further tightening, according to FXStreet.

Baur added that while the Fed can point to a core measure that excludes energy, sustained energy strength can increase the odds of second-round effects as inflation pressures broaden.

He also flagged uncertainty around whether the PCE price index will remain the Fed’s inflation target as Kevin Warsh’s inflation framework review proceeds, warning that flexible definitions could ultimately erode credibility and pressure the US dollar.

Baur cautioned that getting PCE inflation back to below 3% on a year-over-year basis is not assured and could take until later in the year or longer, depending on how the data evolves.

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