- From travel to agriculture to manufacturing, inflation warning signs are everywhere.
- Electronics prices, already heating up, will have one more catalyst from energy inflation.
- The US has immigration crackdown and tariff-related inflation risks as well.
- The response to surging prices would be a curtailment in economic activity.
- Expect wholesale changes in macro forecasts as the crisis becomes protracted.
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Commentary: Varieties of pipeline inflation
Energy inflation is clear and present in the minds of consumers, market participants, and policy makers around the world. Stories abound about spikes in pump prices, energy rationing to counter runs on supplies, public sector austerity measures, and curtailment of services. There is a gradual broadening of the crisis as price pressure moves downstream. Petrol and diesel dominate the headlines, but the really striking case is jet-fuel, price of which has soared to levels higher than even the early days of the 2022 Ukraine invasion. As production processes rely heavily on petroleum products and natural gas, prices of chemicals, plastics, and fertiliser have jumped 20-70% already. Impact on the travel industry, from flight availability to airfare, is evident already. Agriculture and manufacturing would follow, we’re afraid.
With major global shipping services providers adding fuel surcharges of close to 30% in recent weeks, the cost is likely to feed into an already overheated electronics supply chain. Months before the war began, producers were warning about the AI cycle’s pull on a wide range of electronics products. From memory chips to CPUs, microcontrollers to sensors, circuit boards to copper cladding, prices have been surging due to strong demand, constrained supply capacity, and rising cost of metals and processing. Current conditions would add to this dynamic, we’re sure.
There are other sources of pipeline inflation pressure, especially in the US. Immigration tightness is likely to push up cost of services and production processes which have in the past relied on undocumented labour, which include agriculture, construction, home maintenance and renovation, tourism, and retail. Large tax refunds coming in this month from last year’s tax cut legislation could also add to the momentum. Finally, firms that have so far eaten the tariff on their imports will find it convenient to pass on prices during this noisy period, without much scrutiny from the White House.
We had pegged US 2026 core PCE inflation to average 3.1%, while headline CPI inflation to be in the 2.5% area. Given the recent developments, we may have to revise up the forecasts before the month is over.
Beyond the US, inflation prospects may not be as seismic, as governments in many countries would absorb some of the energy price increases through subsidies and burden sharing with energy importers. The pain would be substantial, nonetheless, with balance of payments and fiscal positions worsening, currencies coming under pressure, bond yields rising, and rationing hurting economic activities, thus denting consumer and business confidence. A clogged-up Straits of Hormuz will shave off global growth in 2026; question is for how long and how much.
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