Brent hits $115, but falling pump prices complicate a December Fed hike

Each 10% rise in Brent has added about 2% to US energy prices this year. October's 9% Brent rise has not reached the pump, and markets price an 86% chance of a December hike.

Oil at $115 is already in US inflation, but October's rise has not reached the pump. That gap is the trade into the 10 November CPI release. The energy index may come in flat, and a flat print makes a December Fed hike harder to justify.

The figures show a measurable relationship. Across the seven months from March to September, each 10% rise in Brent has added about 2% to US energy prices. Markets still price an 86% chance of a December hike, according to CME FedWatch, which turns futures prices into odds.

Oil prices and the Fed

Brent crude futures settled at $115.32 on 28 October, up 1.3%, CNBC reported. US consumer prices are rising 3.7% a year.

The Fed already raised rates once this year. On 16 September the committee voted 12 to 0 for a quarter point rise, to 3.75% to 4.00%. The statement said the move "will support a timelier return to the Committee's 2 percent goal".

Energy is driving the inflation behind that decision, and the link from Brent to US consumer prices can be measured. The price history shows a recurring shock, not a single spike.

Brent averaged $71 in February and $103 in March. It peaked at $138.21 on 7 April and fell to $68.53 on 2 July. It has been above $100 since early September.

Energy prices move about one fifth as far as Brent. In March the monthly average for Brent rose 45.5% and the consumer price energy index rose 10.9%. In September Brent rose 25.3% and the index rose 5.2%.

The two moved in the same direction in six of the seven months from March to September. A line fitted through the seven points has a slope of 0.21 and an R squared of 0.79. That means Brent moves account for about four fifths of the variation in energy prices.

In plain terms, a $10 move on $115 Brent is 8.7%, which has meant about 1.8% on the energy index.

May is the exception. Brent fell 8.7% while energy rose 3.9%.

Why pump prices differ

October breaks the pattern. Brent averaged $124.83 to the 27th, up 9.3% on September's $114.16. The fitted line alone would imply a rise of about 2.7% in energy prices.

Pump prices say otherwise. The EIA's monthly average for regular gasoline was $4.31 in October so far, against $4.36 in September, a fall of 1.0%. By the week of 26 October the price was $4.27.

The pump tracks the index. From March to September, the EIA's regular gasoline price and CPI gasoline moved the same way in all seven months. March was up 25.1% at the pump and 21.2% in the index. September was up 7.3% and 9.1%.

The pump figure is not seasonally adjusted and the index is. The match is therefore in direction and rough size, not exact.

Gasoline matters most here. In September it rose 9.1% and, in the words of the BLS, accounted for "over half of the monthly all items increase". Gasoline is now 34.2% higher on the year, the energy index is up 20.4% and fuel oil is up 74.2%.

Core prices, which exclude food and energy, are up only 2.6%. So far this is energy inflation. The Fed's problem is whether it spreads into core.

Core rose 0.3% in September, with shelter up 0.4% and transportation services up 0.6%. Airline fares rose 1.2% in the month, which is how jet fuel reaches core prices. Shelter is up 3.2% on the year, and transportation services are up 2.7%.

The Fed held at 3.75% to 4.00% on 28 October by 10 votes to 2. The statement says economic activity is expanding at a strong pace. It says inflation "remains elevated" and ties uncertainty "in part" to "geopolitical developments", per the statement.

Two members wanted to go further. Lisa D. Cook and Beth M. Hammack "preferred to raise the target range for the federal funds rate by 1/4 percentage point", which would mean 4.00% to 4.25%.

Diesel and supply risks

The sharper pain is in diesel. Retail diesel is $6.35 a gallon, against $4.25 for regular gasoline. New York Harbor diesel is $4.69, and the Gulf Coast refining margin is $42.98 a barrel, according to the US Energy Information Administration.

East Coast distillate stocks were 32% below their five year average in September. The EIA outlook calls this "extreme tightness in diesel markets". Airlines, hauliers and chemical producers buy against that price, so their fuel bills follow the refined product more than the crude headline.

Physical crude is tighter than the screen. EIA's Brent spot price was $123.10 on 27 October, down 3.9% on the day. Brent futures settled at $115.32 on 28 October, up 1.3%, so physical barrels cost about $9 more than the screen.

US West Texas Intermediate futures gained 2.9% on 28 October to settle at $102.78 a barrel.

Both sides of the oil argument have a date. On 9 September Trump said prices would tumble "right after the election", then added that relief would take "a little bit longer than the midterms".

The EIA's October outlook, finished on 1 October, sees Brent at $105 in the fourth quarter and $84 in 2027. It assumes Middle East flows stay constrained through the fourth quarter. It also assumes convoys through the Strait of Hormuz and bypass routes lift output and exports over the forecast period. October has averaged about $125.

The Wall Street Journal reported on 28 October that the US has told Gulf states to expect a short, intense campaign. It would come after the 3 November midterms. Its sources are people briefed on the talks. The Houthis said on 27 October that they fired a ballistic missile at Saudi Aramco's Ras Tanura refinery.

Renewed fighting would land between the next CPI release and the Fed's December meeting.

Dates and figures to watch

The October CPI arrives on 10 November at 08:30. Gasoline, the largest part of the energy index, is down 1.0% at the pump. The index also holds fuel oil, electricity and gas, so it may not fall.

The energy index is more likely to be flat or lower than to rise 2%. A flat reading removes the largest push from the October headline and leaves core to carry the argument for a hike.

The Fed meets on 8 and 9 December. An energy index at or below zero on 10 November lets the committee wait. A rise of 2% or more would make the December hike hard to argue against.

The EIA's November outlook, due the same day, shows whether its $105 fourth quarter Brent path has been raised again.