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

0:00Oil 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, worldwide basic daily essentials are taking a bit of a double hit. So the big question today, are these short-term hiccups or is a second wave of inflation about to force interest rates higher for longer?

0:43Welcome back to the Market Maker podcast and who better than to unpack and break down these numbers than the one and only Piers Curran. Piers, I'm always interested to look at your background. I schedule these calls in with you and there's always like like some sort of luscious background that you're in. And these aren't virtual. So where are you?

1:03Piers Curran: I'm in Dublin, actually. I'm in a hotel room in Dublin, you know, living the dream. Did you know Dublin is the fastest growing city in Europe? No, I didn't know. Yeah, it just keeps Dublin and Dublin. Oh, I'm not going to ask how long you've been working on that punchline. There's plenty more. Shout out to all of the Irish listeners. Let's not let them down then. Brent crude oil topping 100. I mean, it's been swinging around. It's been really the topic of recent months. What's happening in the Hormuz up and down? Where are we at at this present point in time and what's underpinning this latest lift that we've seen?

1:49Piers Curran: 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 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 the conflicts in the straits of hormuz everyone's reading all about this you know you've got u.s and iran like tit for tat strikes um you know u.s you know destroying some iranian tankers.

2:50Piers Curran: You've got Iran targeting US and allied shipping and regional air bases. You've got the Houthis striking Saudi energy infrastructure like the Jezan refinery, for example, also facilities in some of the Saudi kind of southern cities. You've got uncertainty around Karg 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.

3:33Piers Curran: What people perhaps don't quite appreciate, China had huge stockpiles. When this conflict began, they stopped buying because 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, 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've got the biggest buyer back and so like they've got loads of like stockpiles around the place their shandong stockpile which is one of the most important ones you know that's the stockpiles there have fallen 360 million barrels by the end of july that's the lowest in eight months.

4:38Piers Curran: The July drawdown alone just in that one stockpile area, storage facility was 35 million barrels. That's the biggest single month drawdown since 2016. And so look, Chinese imports are back. And so we had a 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 quota. So kind of that's what, yes, the escalation of the conflict, but this big buyer's back. So you could, I mean, some people are saying this is the moment to get us back up to the 110 and who knows beyond that.

5:25Piers Curran: 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 is 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 bosh one and done it'll be over in a week kind of chat well sorry Donald you know here we are nearly seven months on and that seems to be no end to the problem are we getting into slightly more narrow period now where the common belief was, well, the volatility spikes in oil are going to get progressively smaller because we're getting progressively closer to the midterms.

6:10And as we're going to go on to discuss, you know, prices at the pump and so on, like 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 six weeks ago yeah i think what trump's got his ace card in his pocket is that the u.s economy is strong so i think he feels like he's got

6:40Piers Curran: license to be aggressive be that sort of i i don't know what almost like yeah um that that leader that a lot of the MAGA right, you know, love. That strong leader type, almost like a Putin style sort of form of leadership, right? Which the MAGA right really loves. So I think because the economy is strong, he feels a bit braver to kind of, yeah, that's what I would say. But look, 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 businesses or consumers because 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 sub component sub components of crude into usable forms like petrol or the americans would call it gasoline but you know other stuff like paraffin jet fuel you know all this kind of stuff cut is a sub component of crude oil it's actually the refined products that was so whilst crude is back to a hundred dollars that's off its high from the spring whereas if you go to the refined products post refinery those prices are above the spring highs so you'll really feel it so when we start to think about inflation and the impact that's going to have well this is 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 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?

9:12Piers Curran: Diesel is used by the agricultural industry, for example. So, you know, where is this energy price inflation going to lead and feed into? Sorry for the pun, well, it's food. It's food pricing, right? And so this is when central banks have to start to look up and kind of take this seriously rather than it being just an energy supply shop. The longer it goes on, and we're nearly seven months in, the longer it goes on, the more this feeds through into everything else. And then you've got a real problem at a central bank level because what do you do about it? And then economically, the pressure on the central banks, because the latest commentary out of the ECB, although it looks like they're going to hike, there's a bit of division between 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 pipe, as you explain.

10:13Piers Curran: 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 is 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 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.

10:53Piers Curran: 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'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 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 u.s are above four dollars a gallon this is a very psychological level going into the midterm elections this is like a disaster the national average price of gasoline was above four dollars in every single day in the month of august and that has never happened before in history to have a whole month where average price is above four and on labor day which was like two days ago the labor day bank holiday it was at$4.15 um cents 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 kind of really brings it home i think with the refined products and it kind of feeding into this you know more broad spread inflation pressures 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.

12:29And then a day later, right, let's ramp up the tax and prices at the pump are here. It's so interesting about how 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 long-dated contracts and focusing on shorter-dated contracts. What does that mean and why are they doing that? Or why are traders doing that?

13:02Piers Curran: Right. So, when you're trading oil, most traders, if you think of banks and hedge funds and so on, you're not trading physical oil. 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 futures contract for each month let's say going out 12 months into the future and you can start to trade these different contracts I could trade six-month crude, or I could trade 12 months, or I could trade one month, or two months, or three months, right?

13:51Piers Curran: And look, this is good for the airline industry who want to hedge, use that as a hedging tool, because obviously jet fuel is a component of crude oil. So if 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, 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 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?

14:28Piers Curran: And right now, we've got a near-term spike, all this re-escalation 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 town 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, one, two, three, six-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 kind of longer-dated stuff.

15:06Piers Curran: So the liquidity's dropped in the longer-dated stuff, which means the volatility levels will increase. But that's all it is. They're thinking, right, this is... And if you think about the conflict, 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 these conflicts go in waves, right? So whilst we're in the escalation phase, judging by history, we'll have a de-escalation phase that might be in three months' time, right?

15:47Piers Curran: So you're kind of thinking strategically along that kind of curve as to 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 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 said 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 going to be between now and christmas unfortunately your christmas meal is just getting a little bit more expensive christmas is cancelled people uh yeah food inflation in the uk is going to be four percent by the time we get to christmas like to give you an idea it's 1.2 percent now these are year-on-year price changes right so food on average is 1.2 percent higher the prices today than it was 12 months ago.

17:23Piers Curran: 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 the inflation basket, what do you spend money on as an individual on a day-to-day basis, right? 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 percent higher like over the last few months rice that's up 60 percent coffee's up 22 percent sugar's up 27 percent cocoa's up over 100 percent 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 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 Waitrose 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 Piers I go straight to Harrods food court and I just load up on my caviar and crackers there you go caviar prices are up 220 percent uh you might to fact check that um but look obviously this feeds through and like 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 um 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?

19:31Piers Curran: So 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 ongoing and getting worse from a kind of wheat export perspective. Okay, so Rostov, 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 you notice it hasn't rained for about a million years i mean the hose pipe bands so this is a this is really bad then for production right for your farmers trying to produce this stuff no 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 sort of phenomenon and people are worried that this is going to cause much more volatile weather conditions, particularly across the southern part of the hemisphere.

20:34Piers Curran: And you've got a lot of wheat producers going on there. So that will impact production, right? But think about demand. So right now, 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 more like$300 at the start of the year. So you've got this panic buying going on. So 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 gonna land on your supermarket shopping bill it's gonna land on your you know restaurant bill when Anthony Chung's dining out five times a week yeah it's gonna it's gonna add up Piers you know of all people you're the one who always has a go at me when I come in with my tin foiled 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 tin foil corned beef sandwiches i was good down world war ii style i'm in for 12 hour market session here and then you know you're calling me out for five days i was going to mention the corned beef that's the classic what's corn beef inflation corn beef does not have inflation pierce it's it's it no one buys it apart from me and yeah any granddads that are still alive from world war ii and it was tinned back in like 2007 so it's still on the shelf 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 that 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 i think that the mainstream media needs to talk to you more about the double-sided dual force yeah 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 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 street extreme european uk summer drought however i won't mention i went to france and holiday family holiday last week and it was gale force winds rained every day so one holiday and i could not leave the house and the house had four children in it it was a bit of a shit show so then then you had then 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 yeah let's talk about the realities of this from a macroeconomic perspective.

24:03So where are we in terms of these 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.

24:28Piers Curran: Yeah, well, Bailey, that's Andrew Bailey, the governor of the Bank of England, of course. So, I mean, he's been talking, basically saying inflation risks are strictly on the upside. I mean, look, that's an obvious, I mean, such an obvious comment is 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 oi look up we're gonna hike probably 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 percent at the moment that's interest rates here in the UK.

25:21Piers Curran: But yeah, swap markets are basically pricing a very high probability that rates will go up to 4 % in October. Obviously, if between now and then, the crisis in the Straits of All Moons, for example, continues to remain at a heightened level. And if oil prices stay above 100 bucks, I think rate hikes are a shoo-in. The ECB are meeting tomorrow, am I right in saying that? And we're expecting a hike, 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. Japan have hiked. People are hiking.

26:03Piers Curran: 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. like if you're thinking about the US, we've got some really important inflation data tomorrow and inflation levels are on the up. One of the inflation metrics that the Fed particularly, well, I say the Fed, certainly the Fed pre-Walsh were very interested in tracking the core PCE inflation rate. With Walsh now, we're assuming it's the same, but he doesn't talk much.

26:43Piers Curran: but that's tracking higher and we're expecting. And what Walsh said at Jackson Hole, he was very hawkish and the likelihood of a, if you're looking at tracking 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. I mean, that's such a big move. If you go back to the start of this year, we're expecting rates at the end of 26 to be 3%. We're expecting two cuts. So we're actually going to full percentage higher in terms of end of 2026 rate expectations over the course 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 because that's kind of propping everything up.

27:37Otherwise, if earnings weren't strong, we'd have an incredibly different

27:41Piers Curran: sort of picture out there, certainly in the equity markets. But for now, that's kind of propping things up. But this is all feeding into yields. So bond yields, of course, have been a big story in the press recently. Good to get bonds getting a lot of coverage. And this is just because of that inflation situation and interest rate expectations moving up. Japan's 10-year bond yield hit 3 % that's the highest since 1996 UK 10-year gilts 5.2 % that's the highest since 2008 US 10s 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 Germans bond yield is higher since 2011 you know France is higher since 2008 you know so heels 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 wrap it up then given what you just said there what would be the the playbook then from a portfolio perspective so yeah what's the risk of stagflation oh he said it he said the word um i yeah i think it depends right because as i mentioned u.s the u.s situation is strong you know we had a payrolls figure end of last week surprised by fairly chunky surprise to the upside 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 three percent 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 u.s have a strong economy the Fed can hike and it'll be fine, right?

29:55Piers Curran: 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. Other economies aren't as strong. And yes, certainly here in the UK, we're not as strong. We had a decent GDP figure, but the underlying situation is weaker. So we're more vulnerable to inflation tracking up, we're more vulnerable to rate hikes and so on in terms of it having a negative impact on our economy. The worst places though, those that are particularly, if you're thinking more broadly and thinking emerging markets, well then the really killer blow is for 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 hike strengthening dollar um fossil fuel importers so your sri lankas and your pakistans 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've 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 pound weekly shop in early 2020 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.

31:59Piers Curran: Mid 27 um oh 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 pounds that's why you were the former head of trading pierce 150 pounds on the nose boring you're so boring because you're so good it's just boring sorry i'll get it wrong next time yeah please just hundred quid now same shot 150 pounds in the space of six years that's a killer That is your cost of living crisis right there.

33:03Piers Curran: 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. So you hike rates, but then that's even worse, more miserable for certainly consumers, 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 your weekly shops up 50 percent it's literally the double whammy so yeah it's a 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 pierce see you next time catch you later