The New Reality of Energy Inflation Before PCE Data - TMGM Foreign Exchange Analysis

The US core personal consumption expenditure price index for April, due to be released on Thursday (May 28), is far more significant than a regular monthly data update.TMGMFX analysis points out that this data is a key test of whether current regional geopolitical factors can break through the "one-off shock" boundary and penetrate into the broader economic structure, and will also affect whether the Federal Reserve needs to reassess its interest rate path.

Both the market consensus and the Cleveland Fed's nowcast model point to a year-on-year growth rate of the US core personal consumption expenditure price index in April expected to remain around 3.2%, the same as the value before March; about 0.29% to 0.30% in month-on-month, about 3.5% year-on-year, much higher than the Federal Reserve's 2% policy target. The overall data may rise to the 3.3% to 3.8% range due to the continued rise in oil prices.

If the core viscosity exceeds expectations, or the energy transmission effect is significantly stronger than market expectations, the policy pricing of "higher interest rates for a longer time" will be further strengthened, and the market will significantly delay the expectation of the time window for interest rate cuts.

Historical comparison: why this time is not "temporary" inflation

Over the past few decades, every oil-price supply shock - whether a number of regional events or other geopolitical shifts - has triggered the same debate among economists and central bankers: is it temporary or permanent? And history has finally validated the "temporary narrative" again and again: as oil-producing countries increase production, global demand adjusts, and alternative energy sources emerge, oil prices fall and inflationary pressures subside.

But this episode of the situation is disrupting this historical logic in multiple dimensions. The risk of access to key waterways has given rise to a "service fee" mechanism - the so-called "navigation, safety and environmental service fees" charged by local parties for passing tankers, essentially systematically driving up the cost of global oil insurance and logistics. Even if the situation gradually cools down, this fee mechanism is gradually evolving into a lasting structural cost of the supply chain, affecting about 20% of the world's oil trade volume.

At the same time, the rise of tariff barriers, the acceleration of the globalization of the industrial chain, the labor market constraints brought about by the tightening of immigration policies, and the new high energy consumption demand created by the construction of large-scale artificial intelligence data centers together constitute multiple structural bases that have not been available in previous pure supply shocks.

Academic research shows that the impact of traditional oil supply shocks on inflation tends to fade significantly within one to two years, with relatively limited penetration into core inflation. The confluence of multiple structural factors in this round makes it easier for energy prices to continue to penetrate into core inflation areas - services, transportation, housing, etc. - rather than just staying at the overall index level for a short time.

A deep comparison with the oil price shocks of the 1970s

The two oil crises of the 1970s are by far the most widely cited historical references. Supply constraints led to a sharp rise in oil prices, fuelled by easy monetary policy, automatic transmission through wage indexation, and inflation expectations completely lost their anchor, eventually leading to severe stagflation. Volcker, then Fed chairperson, traded a base rate of close to 20 per cent for a fall in inflation, but at the cost of a deep recession.

The similarities with the 1970s are that geopolitical supply shocks superimpose existing inflationary pressures, that consumers' long-term inflation expectations have shifted upward, that latent risks of a wage-price spiral also exist, and that the transmission path of energy prices to the broader economy is quite similar.

But key differences cannot be ignored either: the economy is now much less dependent on oil, and energy efficiency and diversification have reduced the transmission of shocks; wage indexation in the labour market is far less rigid than it was then; the Fed's inflation targeting framework is more mature, and long-term inflation expectations are generally still relatively anchored, although there are signs of an upward shift; and this shock occurred against the backdrop of a policy tightening cycle, not an era of extreme monetary easing.

Taken together, the shock is unlikely to fully replicate the extreme stagflation of the 1970s. But its structural component makes inflation far more viscous than any pure supply shock in history. It is more like "mild but persistent structural pressure". The Fed's traditional strategy of "ignore and wait to subside" is being severely tested.

The Federal Reserve is highly vigilant about the persistence of inflation

The March FOMC meeting notes that most participants believe that "further policy tightening is likely to be appropriate" if inflation persists above the 2 per cent target. They are particularly concerned that the lasting impact of energy prices could push core inflation further higher through higher input costs and make headline inflation fall more slowly than previously expected.

The effect of this energy shock on previous price shocks such as tariffs may be similar to the continuous shock pattern during the epidemic. The standard ignore strategy may be completely ineffective under the superposition of multiple shocks.

Federal Reserve officials have publicly stated that

At the institutional level, the Peterson Institute for International Economics believes that the upside risk of inflation exceeding 4% in 2026 is significantly higher than the baseline scenario, driven by the mutual reinforcement of tariff shocks, fiscal deficit expansion, labor constraints, energy bottlenecks, and the upward shift in inflation expectations.

Mainstream investment banks such as Morgan Stanley have also regarded structurally high inflation as a "new normal" in a sense, and international monetary funds and professional forecasters have accordingly raised the center of near-term inflation expectations, mainly due to the second-round transmission effect of energy shocks.

Consumers' true feelings: the folk temperature behind the data

Beyond the macro data, consumer surveys are sending more direct signals to the market. The University of Michigan's final consumer confidence index fell to a multi-decade low of 44.8 in May, from 49.8. One-year inflation expectations edged up to 4.8 per cent, while long-term expectations for five to 10 years climbed to 3.9 per cent. The latter's continued upward trend is particularly noteworthy.

More significantly, a whopping 57 per cent of respondents spontaneously mentioned in open-ended questions that "high prices are eroding personal finances". The impact of higher oil prices has spread from the fuel end to broader sectors such as food, transport and services, with low-income groups feeling particularly strongly. When consumers' long-term inflation expectations persist at 3.9 per cent, rational wage negotiations must begin to reflect this expectation - and the bar for the wage-price spiral to evolve from theoretical risk to real stress is quietly lowering.

Asset impact: High oil prices or a new equilibrium, gold faces a dilemma

From the perspective of asset allocation, the structural transformation of this round of inflation pattern will profoundly reshape the risk-return framework of various assets. In terms of oil prices, the service fee mechanism, the continued risk of key channels and global energy bottlenecks jointly support oil prices to remain high for a long time. Even if the geographical factors ease in stages, the recovery speed of supply will be much slower than in the past. High oil prices will continue to be transmitted to the broader price system through channels such as transportation costs and production costs. Roughly estimated at $10 per barrel of oil prices, it can contribute an additional 0.2 percentage points of inflationary pressure, and the cumulative effect cannot be ignored.

In gold, geopolitical risk aversion logic and long-term allocation demand still provide some support for gold prices, but the combination of "persistent high inflation and higher interest rates for a longer period of time" will form a significant opportunity cost constraint on gold. High real yields, relatively strong US dollars and cautious Federal Reserve policies will systematically suppress the upward space of gold prices. Although the current gold price is at a historical high, in the case of a long-term high interest rate environment, the sustainability of extreme highs is facing a severe test, and the fluctuation range may be further widened.

Core Conclusion

If tomorrow's core PCE price index is more viscous than expected, or the transmission of energy prices to the service side is significantly stronger than forecast, the Fed's interest rate cut window will be further delayed, and the market's pricing of "higher interest rates for longer" will be strengthened. According to TMGM foreign exchange analysis, the core challenge of this round of inflation is that its driving force has escalated from a simple energy supply shock to a multi-intertwined systemic pressure of regional structure, supply chain restructuring and expectation mechanism, which has greatly narrowed the scope for application of the historically effective "ignore and wait for subsidence" strategy. The central dilemma facing the Fed is to find a balance between economic growth pressures and the persistence of inflation - the former does not support active interest rate hikes, and the latter does not allow premature easing. " The "wait and see, act according to data" stance will be strengthened, but policy flexibility is continuing to narrow.