There were no surprises in the U.S. inflation report yesterday. Both core and headline inflation came in line with expectations, at 2.5% and 2.4% respectively, and as you can see in the chart below, with a trend to stabilization, still above the 2% target, but close enough. The problem may start to come in March, as the oil shock due to the strait of a Hormuz closure hits gasoline prices at the pump. But the real kick may appear in April-May, as there is a lag in the transmission mechanism. That’s why the US and other countries are trying to release oil strategic reserves, to ease the temporary pain. How temporary will it be, though? Forward curves do show oil prices coming down in the following months, expecting tension to ease, but it’s not clear at this point how long the disruption can last. Headline CPI will reach 3% if a 10% increase in oil prices is sustained. And it will take 3-6 months to fade, if oil prices come down. That will derail any attempt front the Fed to lower rates, perhaps for the rest of the year, and particularly before the midterms, and it may push long term yields up, which will affect the deficit, the debt to GDP, and the dollar. Increíble to see in this day and age how 21 miles (the width of Hormuz) can impact the whole world.

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