Oil at $100 and the inflation the Fed can't ignore

Brent crude has broken above $100 for the first time since late July, and the timing could hardly be worse for a central bank hoping inflation would fade quietly. The move is being driven by a sharp escalation in the Middle East – Houthi strikes on Saudi cities, US strikes on Iranian oil tankers, and Iranian missiles fired at a US base in Jordan. With Friday's CPI due and the Fed meeting a week later, the energy spike lands at the worst possible moment.

Higher prices are getting embedded

The concern is no longer a one-off jump in the headline number. Higher energy costs filter through the broader economy, feeding into transport, production and eventually the price of almost everything else. That is the mechanism by which a supply shock stops being a supply shock and starts becoming general inflation. The longer crude sits above $100, the more that second-round impulse works its way into core.

Inflation was already sitting above target before oil moved. Add a sustained energy shock on top and the risk is that higher prices become baked into the system rather than washing out. Markets have responded accordingly, pricing around a 60% chance of a September hike after last week's strong payrolls report. The labour market is giving the Fed cover to act; the oil-driven inflation risk is giving it a reason to.

What CPI needs to show

Friday's CPI is the number that decides it. Inflation remains the chief determinant of policy here – payrolls speaks to growth, but it is price pressures that pull the trigger. A hot print, particularly one showing energy bleeding into core, would confirm the embedding thesis and likely seal a September move. Thursday's PPI is the warm-up, offering an early read on the pipeline pressures feeding into the consumer number.

There is a credibility angle too. With a hike already majority-priced, holding would risk the Fed looking like it was backing down in the face of geopolitical noise – hardly the signal an inflation-fighting central bank wants to send.

The case for caution

The awkward truth is that this is supply-driven inflation, and rate hikes address demand. Tighter policy cannot unclog the Strait of Hormuz or restore disrupted oil flows. Tightening into a supply shock risks dampening demand for little gain on energy costs – a stagflationary dynamic rather than a cure for one. The conflict has also flared periodically rather than settling into a sustained war, so a de-escalation could reverse the oil spike quickly and leave a hike looking premature.

Financial conditions are tightening on their own, too. German 10-year yields have reached 3.38%, the highest since April 2011, spreads are widening, and equity markets are showing risk-off breadth. A soft CPI would give the Fed every reason to let that do the work and wait.

The read into 17 September

The bet on a hike rests on the idea that oil is turning a temporary inflation problem into a lasting one. Friday's CPI will show whether that is already happening. A strong print, with energy visibly feeding through, and a September move looks close to sealed. A softer one, particularly if crude starts to ease back, and the Fed has the cover it needs to hold. Watch PPI on Thursday for the early signal, but the FOMC's decision on 17 September will turn on whether $100 oil is a passing spike or the moment higher prices got embedded.