Oil Overshadows US Inflation Optimism

• Last week’s cooling US inflation data briefly fuelled hopes that the Fed’s hawkish outlook would be softened, however, surging oil prices have quickly complicated that narrative. Renewed conflict in the Middle East pushed Brent crude back towards US$90/bbl, raising the risk that higher energy costs reignite inflation and delay interest rate relief globally.
• Fed officials continue to reinforce that the inflation battle is far from won. Despite encouraging CPI data, policymakers remain prepared to tighten again should price pressures prove persistent, while markets have largely ruled out a July hike following last week’s softer inflation data, investors continue to expect at least one further 25bp increase later this year, reflecting the Fed’s cautious stance on inflation.
• Energy markets remain the key upside risk. Escalating tensions in the Middle East have increased the likelihood that higher fuel costs feed back into Australian inflation, complicating the outlook for central banks already weighing easing price pressures.
• Attention now shifts back to Australia’s labour market, where another resilient employment report would strengthen the case for the RBA to remain patient rather than pivot toward rate cuts. Major banks expectations are held at 4.4%, while markets continue to assign only a modest probability of an August hike ahead of next week’s CPI release.