Is Inflation Coming Back? Why Oil, Food Prices & Interest Rates Are Rising

Oil prices are topping $100 is making all of their headlines as we record this this week. But the real story is what you're paying at the pump and the supermarket checkout. Most of us don't buy, of course, raw crude oil. We buy petrol, diesel, bread, rice, these sorts of things. And right now, all of them are surging higher together. So between military conflicts disrupting fuel shipments and extreme weather hitting crop harvests worldwide, basic daily essentials are taking a bit of a double hit. So the big question today, are these shortterm hiccups? Or is a second wave of inflation about to force interest rates higher for longer? Welcome back to the Market Maker podcast. Then who better than to unpack and break down these numbers than the one and only Pier Curran. Piers, I'm always interested to look at your background. I schedule these calls in with you and there's always like a some sort of luscious background that you're in and these aren't virtual. So where are you? Uh I'm in Dublin actually. I'm in a hotel room in Dublin, you know, living the dream. Did you know um did you know Dublin is the fastest growing city in Europe? just keeps >> Yeah, just it just keeps doubling and doubling. I'm not going to ask how long >> you've been working on that that punch line, but uh >> anymore. >> Shout out to all of the uh Irish listeners. Let's not let them down then. Brent crude oil topping 100. I mean, it's >> it's been swinging around. It's been really the topic of recent months. you know what's happening the homoo up and down where are we at at this present point in time and what's underpinning this latest lift that we've seen >> yeah we're back above 100 bucks this is the breaking news this is on Brent crude um we did briefly touch 100 bucks 23rd of July very brief um but but actually you know this takes us back to really levels from the spring right so obviously this conflict started back at the end of February prices jumped and we spent, you know, good chunk of time above $100 through March and April and and May, right? But really since May, we've kind of been lower. So, this is back to 100. This is really important. Obviously, everyone's reading about one side of it. I'm going to talk about the other actually, which people aren't really um putting out there. The one side you're reading about is on the supply side escalation of of the conflict in the Straits of Hormuz. Everyone's reading all about this. You know, you've got US and Iran like tit fortat strikes. Um, you know, US, you know, destroying some Iranian tankers. You got Iran targeting US and allied shipping and regional air bases. You got the Houthis striking, you know, Saudi energy infrastructure like the Jazan refinery, for example. also facilities in some of the the Saudi kind of southern cities. You've got uncertainty around um K Island. That's the big Iranian hub. About 90% of Iranian crude exports comes out of that island. And so look, the supply side, we know that story. What I want to talk about is actually the demand side because China, which are the biggest importer of crude oil on the planet, we're looking at about 11 million barrels a day normally on average. What people perhaps don't quite appreciate, China had huge stockpiles. When this conflict began, they stopped buying cuz they're like, "Well, all right, I don't want to buy at 100 bucks, thanks. I'll just eat into my reserves. That's what they're there for. We spent years building them up. Let's just use those. So, actually, you know, why did crude oil really I mean, we kind of topped out, let's just roughly say around about $110 bucks in the spring. Why wasn't it $150? Why wasn't it $200? It's basically because the big drop in supply was offset by the biggest buyer in the market stepping out. But reserves are finite. And so actually what we've seen in August and they're coming into September, China are basically back. They're back in the market because they have to be. And so ultimately you got the biggest buyer back. And so like they've got loads of like stock piles around the place. Their Shandong stockpile which is one of the most important ones you know that's the stock piles there have fallen 360 million barrels by the end of July. That's the lowest in eight months. um the July draw down you know alone just in that one kind of um stockpile area storage facility was 35 million barrels that's the biggest single month draw down since like 2016 um and so look Chinese imports are back and so we had a 22 monthth sorry 22% month-on-month increase in crude imports in July and now that's increased in August to 10 million barrels they're almost back to fully buying at their 11 million barrels per day quotota. So kind of that's why yes the escalation of the conflict but this big buyer is back. So you could I mean some people are saying this this is the moment to get us back up to the 110 and and who knows beyond that. But back to the point, you know, on the broader point about inflation, obviously this feeds into inflation, but it's like how the hell do you predict this? Because how long's the conflict going to last for is an open-ended question that really I mean I certainly can't answer. And whilst, you know, Trump back in February was like this is going to be bang bosch one and done. It'll be over in a week kind of chat. Well, sorry, Donald. You know, here we are nearly 7 months on and seems to be no end to the problem. >> Are we are we getting into a slightly more narrow period now where the common belief was, well, the volatility spikes and all are going to get progressively smaller cuz we're getting progressively closer to the midterms and as we're going to go on to discuss, you know, prices at the pump and so on. like he he wants to manage the optics for the electorate when it comes to that political event, but he's still got he's still the aggressor it would seem at the moment. Is this what's causing a bit of a surprise as well against what the common belief was maybe 6 weeks ago? >> Yeah. I think what Trump's got his ace card in his pocket is that the US economy is strong. So I think he feels like he he's got license to be aggressive, be that sort of I I I don't know what almost like Yeah. Uh um that that leader that a lot of the MAGA right, you know, love that that strong leader type almost like a Putin style sort of form of leadership, right, which the MAGA right really love. So I think because the economy is strong, he's he feels a bit braver to kind of Yeah, that's that would that's what I would say. Um, but look back I you mentioned diesel and you mentioned like gasoline and petrol because look, we don't buy crude oil, right? You know, governments buy crude oil. Refineries buy crude oil. We don't buy crude oil as as businesses or consumers cuz it's not really in a usable form. So crude oil gets sent to a refinery. It then gets cracked. So this is a chemical process that kind of cracks out breaks out the subcomponent subcomponents of crude into usable forms like petrol or the Americans would call it gasoline. U but you know other stuff like paraffin, jet fuel, you know all this kind of stuff is a is a subcomponent of crude oil. It's actually the refined products that was so whilst crude is back to $100 that's off its high from the spring. Whereas if you go to the refined products postrefinery, those prices are above the spring highs. So you're really feeling. So when we start to think about inflation and the impact that's going to have, well, this is a a larger inflation problem now than it was back in the spring, even though the crude price is is lower than the spring. And that's because what we actually buy as consumers, that stuff is at at record highs. So yeah, I mean I guess you've kind of got, you know, refinery outages is one of the reasons. So and actually forget about the Straits of Hormuz. It doesn't get much column inches, but the Ukraine Russia conflict is actually really contributing here. So Ukraine drone strikes on Russian infrastructure. Uh you've got kind kind of Red Sea kind of blockades. you've got uh Russia, you know, halting exports of refined products and this is kind of all feeding into that situation. So, um yeah, I mean what I would say is like if you think about diesel, so this is kind of used by particularly thinking about inflation, right? Diesel is used by the agricultural industry for example. So, you know, where where is this energy price inflation going to lead and feed into? Sorry for the pun. Well, it's food. this food pricing, right? And so this is when central banks have to start to look up and and kind of take this seriously rather than it being just an energy supply shop. The longer it goes on, and look, we're nearly 7 months in. The longer it goes on, the more this feeds through into everything else. And then you got a real problem at a central bank level. Um because what do you do about it? And then economically the pressure on the central banks because there the latest commentary out of DCB although it looks like they're going to hike there's a bit of division between >> we're we're seeing this happening now and do we take this quote unquote preemptive action to lift rates on something that hasn't yet really fed down the pipes as you explained. >> This is the headache. The argument is well all right do we raise rates now because inflation is higher but the problem with raising rates is it's a kind of drag on economic growth right so how strong's the underlying economy you know is it strong enough to deal with increasing interest rates now and this is the great debate that's happening around the central bank policy setters tables right across the planet the Kiwis New Zealand hiked interest rates last week second time um this year and they kind of released their minutes and stuff and there's a big debate going on around that table about exactly this. Some of the some of the setters are saying look we shouldn't be hiking here. The economy is not strong enough. The others are like look we need to start because if this thing lasts longer we're we'll just have to hike rates faster in the future. So actually let's just kind of start creeping them up now so that that future scenario you know becomes less impactful if if you like. So, this is the great debate, but I was just going to make one point, sorry, about the refined products. And this was this was kind of blew my mind a little bit. Here's a stat for you. Gasoline prices at the petrol pump in the US are above $4 a gallon. This is a very psychological level going into the midterm elections. This is like a disaster. Um, the national average price of gasoline was above $4 in every single day in the month of August. And that has never happened before in history to have a whole month where average prices above four. And on Labor Day, which was like 2 days ago, the Labor Day bank holiday, it was at $4.15 um which was the highest ever gasoline price on that holiday. It's a bit obviously holidays, lots of driving going on. So yeah, look, that that kind of really brings it home, I think, with the refined products and it and it kind of feeding into this, you know, more broadspread um inflation pressures. I' I'd love to be the the spin doctor sat around the administration's table of when payrolls comes out and it's super strong and then a day later right let's ramp up tax and prices at the pump are here it's so interesting about how their the balance between these different factors but I wanted to go back to food in a moment to round off I read an article out of Morgan Stanley and their analysts were talking about this idea of traders abandoning longdated contracts and focusing on shorterdated contracts. >> What what does that mean and why are they doing that or why are trading >> right? So in when you're trading oil most traders if you think at banks and hedge funds and so you you're not trading physical oil. You're not you're not messing around with actual physical barrels. You've got storage headaches, you know, you've obviously got shipping and transport or what? Yeah, it's just a massive headache. Forget that. Let's just trade futures, the derivatives, right? And there we're thinking about different futures contracts. And you have basically a a futures contract for each month. Let's say going out 12 months into the future. And you can start to trade these different contracts. cuz I could trade 6 month crude or I could trade 12 month or I could trade 1 month or 2 months or 3 months, right? And look, this is good for the airline industry who want to hedge use that as a hedging tool cuz obviously jet fuel is a component of crude oil. So if a airlines worried that their jet fuel prices are going to go up in the future, they can start hedging in that crude oil futures market going out, you know, you know, 12 months. But like the other way to think about this is well where do you think as a trader where do you think or or how long do you think this crisis is going to last and where do you think thinking about the price of crude oil and trying to plot it out over the next 12 months how do you think it's going to behave and right now we've got a nearterm spike all this reescalation of stuff in the straits of Hormuz as I said Ukraine Russia stuff kicking off that's also having an impact China biggest buyer in pound back in the market. So traders are thinking right all this action on the upside is going to be in the nearer term. So most of the volumes kind of come towards that yeah 1 2 3 6 month phase rather than trying to start to trade 12 months and beyond. So that kind of has two impacts because you have more volume in the front months you have less volume in the in the kind of longerdated stuff. So the the liquidity's dropped in the longer dated stuff which means the volatility levels will increase. Um but that's all it is. They're thinking right this is and and if you think about the the conflict you know when it kicked off we had that big phase as I've said March April May above $100. Then it all backed off right negotiations happened deals were getting done. Obviously they didn't get done in the end but so oil prices dropped again June July first half of August. So you these these conflicts go in waves right so whilst we're in the escalation phase judging by history we'll have a deescalation phase that might be in 3 months time right so you're kind of thinking strategically along that kind of curve as to you know where you think the most disruption to the oil price is going to be out over that 12 month picture. Well, let's maybe talk about then that more silent pressure that you mentioned which is beyond the petrol pumps and in the supermarket aisles and how those kind of I guess would it be up upstream prices are kind of causing disruptions then to the shelf that consumer is there then experiencing to compensate for the increased costs of what these like you say agriculture it doesn't really get you know people rarely talk about farming because they're too busy talking about headline oil prices So, what does that look like in terms of let's just break down maybe what a CPI basket is, what it looks like, and how some of these core staple product prices are moving, and as to what degree is that going to impact the consumer. I've got a spoiler alert. I'm afraid it's going to be a Scrooge Christmas because the headlines are that it's gonna be between now and Christmas. Unfortunately, your Christmas meal is just getting a little bit more expensive. [laughter] Christmas is canled, people. Uh yeah, food inflation in the UK is going to be 4% by the time we get to Christmas. Like to give you an idea, it's 1.2% now. The these are year-on-year price changes, right? So food on average is 1.2% higher the prices today than it was 12 months ago. By Christmas, it'll be 4% higher than 12 months ago. That's going to climb, right? We're thinking by July, summer of next year, it'll be 6.4%. Thinking about the components of of of the inflation basket. You know, what do you spend money on as a as an individual on a on a day-to-day basis, right? It's food is obviously a key part of that. It's energy. It's kind of recreation and culture. You're looking at transport. You're thinking about stuff like restaurants and hotels. It's like housing and utilities. And so food and non-alcoholic drinks is a component, right? And so that that component's on the up. And the reason that's on the up, it's kind of what we've been talking about. Wheat is wheat prices are 45% higher like over the last few months. Rice, that's up 60%. Coffee is up 22%. Sugar's up 27%. Coco's up over 100%. Like this year, right? Pricing. So, this is obviously going to feed in. These are your kind of wholesale staple kind of agricultural commodities that then get bought and and then packaged and sold in supermarkets. So, basically your supermarket shop, you were spending like, I don't know, depends what you buy. If you're Anthony Chung, you know, going to the most expensive uh supermarket like maybe well certainly Waitros or maybe that's not even good enough for an Anthony Chung. It might be like M&S food or something. >> I just go straight to Harrods Pier. I go straight to the Harrods food court and I just load up on my caviar and crackers. >> There you go. Caviar prices are up 220%. Uh you might have to fact check that. Um but look, obviously this feeds through unlike corn's up 17. Yeah. So, you know, why is this? Well, wheat, well, this is a big problem. Like Ukraine and Russia are basically the two biggest producers and there's been big setbacks due to the escalation of the conflict. You know, there's been big setbacks, you know, attacks on each other's grain terminals. You know, when you're in a war, you want to target the facilities that are going to cause the most pain economically, right? So, they're they're kind of targeting each other's grain terminals. So obviously like Russia August wheat exports were their lowest in more than a decade. So this conflict is is ongoing and getting worse from a kind of wheat export perspective. Okay. So um Rostoff which is one of the kind of grain terminals declared a state of emergency. You know port closures causing massive pileups of grains at farms and so on. Add to that the drought. By the way, if you notice, it hasn't rained for about a million years. I mean, that host pipe bands. So, this is a this is really bad then for production, right? For your farmers trying to produce this stuff. No rain has been a real killer. Um, rice, other stuff going on. El Nino. I don't know if you've been reading about the El Nino sort of phenomenon and people are worried that this is going to cause much more volatile, you know, weather conditions, you know, particularly across the southern part of the the hemisphere and you got a lot of wheat, you know, producers going on there. But so that'll impact production, right? But think about demand. So right now um the Philippines and Malaysia, they're two of the biggest buyers of rice. And what are they doing? They're stockpiling. There is panic buying of rice because they're worried the El Nino effect is going to mean supply collapses in the future. So they're buying it up. So the cost of rice now is $480 a ton. That's up from like more like $300 at the start of the year. Okay. So you got this panic buying going on. So all all these kind of both demand and potentially future supply issues or current supply issues all feeding into commodity prices rising. And unfortunately this is going to land on your supermarket shopping bill. It's going to land on your, you know, restaurant bill when Anthony Chung's dining out five times a week. Yeah. It's going to it's going to add up. Now, Pier Pier, you know, of all people, you're the one who always has a go at me when I come in with my tinfoiled homemade sandwiches, which is a scarring from my days of working with people like you, traders, who would never allow me to leave my desk ever. >> So, I'd come fully prepared with tinfoil corn beef sandwiches, hunkered down, World War II style. I'm in for 12-hour market session here and then you know you're calling me out for 5 days. >> I was going to mention the corn beef. That's the classic. What's corn beef inflation? >> Corn beef does not have inflation peers. It's >> it's it No one buys it apart from me and any granddads that are still alive from World War II. >> And it was tinned back in like 2007. Um, you know, if it's a weekend, I might get some tinned spam and then deep fry it and have it with ketchup. >> Wow. I mean, no words. I have no words for my diet. >> Well, look, I think I think then it is super interesting and as you're you know, you're kind of whipping me up into this inflation storm here. I'm feeling very uh uh I think the the the mainstream media needs to talk to you more about this double-sided dual force. But I guess articulating it if you're a student and you are going into interviews at the moment. So you were talking about direct inputs. So high energy but think packaging, think logistics, all driven out of this Iran conflict but also with what you said out of Russia and Ukraine still ongoing probably not spoken about enough. But then the weather and the weather you can break into two sections. Domestic weather. We've all experienced this extreme European UK summer drought. However, I won't mention I went to France on holiday, family holiday last week and it was gale force winds rained every day and one holiday and I could not leave the house and the house had four children in it. >> It was a bit of a show. [laughter] Then then you had but so you got the domestic weather scenario. So think about winter wheat, barley, oats, things like that. And then the global weather one, the El Nino. You mentioned crops in Asia, Latin America, rice, coffee, palm oil. So yeah, super interesting. So maybe let's move this along then and >> let's talk about the realities of this from a macroeconomic perspective. So where are we in terms of these uh supply side shocks and this consumer demand situation and what are the signals that we're getting from the various different global central banks of what they're thinking? You mentioned the Kiwis are divided. I've mentioned the European Central Bank are divided. What about the Bank of England which is a little bit closer to home perhaps? >> Yeah. Well, Bailey, that's Andrew Bailey, the governor of the Bank of England, of course. Um, so I mean, he's been talking basically saying inflation risks are strictly on the upside. I mean, look, that's an obvious such an obvious comment is that that that's him stating the obvious, except that's really important when those words come out of the mouth of the very man who's in charge of the country's interest rates. That's him sending a hawkish signal to the market. Translate read between the lines. That's him saying, "O look up. We're going to hike probably." Well, we're currently thinking October, aren't we? I believe is the the kind of in terms of rate expectations. So, right, we're at 3.75% at the moment. That's interest rates here in the UK. But yeah, swap markets are basically pricing a very high probability that rates rates will go up to 4% in October. Obviously, if between now and then the crisis in the face of hormoons for example continues to you know remain you know at a heightened level and if oil prices stay above 100 bucks I think you know rate hikes are a shoein. The ECB are meeting tomorrow am I right in saying that? and that we're expecting a hike, a second, another hike from the ECB. As I've mentioned, the Kiwis hiked for a second time. Australia, they were the first to start hiking. They've hiked three times this year already. Uh Japan have hiked. People are hiking. It's really just well, not just, but like thinking about lead, let's just say G7 economies, the UK and the US are a bit they're outliers here a little bit in that they haven't hiked yet. And like so, yeah, we're expecting a hike from the Bank of England. If you're thinking about the US, we got some really important inflation data tomorrow. Um, and you know, inflation levels are on the up. One of the inflation metrics that the Fed particularly, well, I say the Fed, certainly the Fed pre-WHS were very interested in tracking the core PCE inflation rate with WSH. Now, you know, we're assuming it's the same, but he doesn't talk much. So, but that that's tracking higher and we're expected. So, you know, and and what Walsh said at Jackson Hole, he was he was very hawkish and and and the likelihood of a you know, if you're looking at tracking at um expectations then we're right now by the end of 2026, we're expecting Fed rates to be at 4%. So, that would be two hikes. If you go back, I mean, that's such a big move. If you go back to the start of this year, we were expecting rates at the end of 26 to be 3%. We're expecting two cuts. So, we're actually gone a full percentage higher in terms of end of 2026 rate expectations, you know, over the course of of this year, which is yeah, that's a big big move. And it's just a good job that the underlying economy and particularly corporate earnings are just phenomenal cuz that's kind of propping everything up. Um otherwise, you know, if earnings weren't strong, we'd have an incredibly different sort of picture out there, certainly in the equity markets, but for now, that's kind of propping things up. But, you know, this is all feeding into yields. So, bond yields of course have been a big story in in in the press recently. Good to good to get bonds getting a lot of coverage. And this is just because of that inflation situation and interest rate expectations moving up. You know, Japan's 10-year bond yield hit 3%. That's the highest since 1996. UK 10-year guilts 5.2%. That's the highest since 2008. US 10's not as high, 4.8% and it's actually only the highest since January 2025. So, they're a little bit of an outlier. But German's bond yield is highest since 2011. you know, France is highest since 2008, you know, so yields are high and you know, we're going to get hikes and it's just a question of how many and does energy prices remain elevated, I guess. So, so I guess to to wrap it up then given what you just said there, what would be the the playbook then from a portfolio perspective? So, >> what's the risk of stagflation? >> He said it. He said the word. Um, yeah, I think it depends, right? Because as I mentioned, US the US situation is strong. you know, we had a payroll figure end of last week, surprised by fairly chunky surprise to the upside. Um, so the labor, you know, unemployment rates are super low still. You know, the labor market's strong and solid. Yes, wage growth is slowing, but it's still still above 3%. It's decent. So, you look at those macro numbers and they're they're decent, right? You look at corporate earnings, they're flying. I mean that you know obviously the AI boom but that I mean the corporate earnings are just rampant right so that's fine the US have a strong economy the Fed can hike and it'll be fine right US stocks can weather the storm of one or two rate hikes as long as those underlying earnings remain solid go out of the US and it starts to look a different picture you know other economies aren't as strong. Um, and yeah, certainly here in the UK, we're not as strong. We had a decent GDP figure, but you know, the underlying situation is weaker. So, we're more vulnerable to inflation tracking up. We're more vulnerable to, you know, rate hikes um, and so on in terms of it having a negative impact on our economy. The worst the worst places though those that are particularly if you're thinking more broadly and thinking emerging markets well then the really the killer blow is for any any countries who are in the low or kind of lower middle income bracket who are fossil fuel importers. This is like a this is like a killer recipe. You know Fed rate hikes strengthening dollar um fossil fuel importers. So your Sri Lankas and your Pakistan um would be in that bracket a bit more not not so much lower middle income a bit higher up the food chain you got like Hungary and India both really heavy oil importers. Japan's a big oil importer. So those types of countries if you're if you're a net energy importer you you got a real problem if and especially if the Fed starts hiking and you get a bit of dollar strength just to rub salt into the wound. Talking of rubbing salt in the wound, perhaps a stat to finish with. >> So, let's for our UK listeners, a standard 100 weekly shop in early 2020. Um, so what do you reckon that 100 pound weekly shop just five six years ago would be by the middle the expected given some of the food inflation numbers you were saying would be by mid 27? mid 27. Um, it's a good question. Well, food inflation was super high when we had the inflation crisis in like 2023, 22, 23. You know, the headline inflation got to 10% here in the UK, but I know food inflation was a lot higher. When you start compounding at like 10%. That's like big. That's going to start to add up. So yeah, I don't know. £150. >> That's why you were the former head of trading, Pierce C. [laughter] £150 >> on the note. >> You're so boring. >> You're so boring because you're so good. It's just boring. [laughter] >> Sorry. >> H >> I'll get it wrong next time. >> Yeah, please. Just >> 100 quid now. Same shot. £150 in the space of six years. That's a killer. That is your cost of living crisis right there. This is the problem of our times. Good luck if you're a government or a central bank >> because I just don't know what you do. Do you hike rates? But then that's even worse more miserable for certainly, you know, consumers, you know, variable rate mortgages or you're having to refinance your mortgage. It's just an absolute killer. You're going to have to pay a lot more debt interest costs and [snorts] your weekly shops up 50%. It's it's literally the double whammy. So, yeah, it's big problem for these policy setters. All right. Well, yeah, if you have an opinion, thoughts, yeah, please do share them with us. Drop us a comment and yeah, thank you, Pier. See you next time. Cast light.