How Will Rising Oil Prices Reshape the U.S. Economy and Politics?

Chief Economist and Director of Research Institute at Yuekai Securities: Luo Zhiheng

Senior Macro Analyst: Fan Chengkai

On March 11, Beijing time, the U.S. Bureau of Labor Statistics (BLS) released the U.S. inflation data for February 2026: U.S. CPI and core CPI increased by 2.4% and 2.5% year-over-year, respectively, indicating that inflation remains stable. Before the US-Iran conflict, the key variables affecting U.S. inflation were tariffs and endogenous economic demand, rather than energy prices. However, the outbreak of the US-Iran conflict disrupted the stability of international oil prices, necessitating a reassessment of the potential impact of sharp oil price increases on U.S. inflation and the economy.

In the U.S., consumer demand for refined oil products, the difficulty of passing on costs to businesses, and the influence of oil prices on inflation expectations all differ from China, making the overall impact of oil prices on U.S. inflation more significant.

Although high oil prices triggered by the Russia-Ukraine conflict in 2022 did not cause a substantial recession in the U.S., they led to significant rate hikes by the Federal Reserve, pessimistic economic expectations, and adjustments in capital markets. Under the special political and economic context of the 2026 U.S. midterm elections and weakened Fed independence, the secondary effects of this round of oil price increases on inflation, livelihoods, policy responses, and asset prices may be amplified.

What is the current state of U.S. inflation? How will rising oil prices specifically influence the trajectory of CPI? What are the secondary impacts on the U.S. economy, livelihoods, and politics? Under the risk of “stagflation-like” conditions, how will the Federal Reserve respond?

1. What was the U.S. inflation situation before the oil price increase?

U.S. CPI in February 2026 remained stable, with energy prices not being the main driver of inflation. The February 2026 CPI (not seasonally adjusted) increased by 2.4% YoY, and core CPI by 2.5%, both unchanged from the previous month and lower than the average level in 2025. Structurally, the main contributors to YoY CPI growth were services and essential consumption items, with housing contributing 1.07 percentage points, food 0.42, and medical care 0.29. In contrast, energy prices rose only 0.5% YoY, contributing just 0.03 percentage points to the overall CPI increase, almost negligible. During the 2022 Russia-Ukraine conflict and oil price surge, energy contributed over 2 percentage points to CPI, becoming a major driver of high inflation. This comparison clearly shows that before the current US-Iran conflict, energy prices’ contribution to U.S. inflation had fallen to very low levels and was not the main contradiction of current inflation.

Prior to the outbreak of the US-Iran conflict, international oil price expectations remained stable. According to the U.S. Energy Information Administration (EIA) forecast released on February 10, 2026, Brent crude oil prices in 2026 are expected to average $58 per barrel, down 16% from $69 in 2025, showing a downward trend.

Without considering the disturbance from the US-Iran conflict and oil price increases, the 2026 U.S. inflation trend would mainly be determined by tariffs and endogenous demand. On one hand, the impact of recent tariff hikes on domestic prices is complex, with some lag effects possibly emerging in 2026, exerting upward pressure on prices. On the other hand, the U.S. labor market is relatively weak, with insufficient endogenous growth momentum, and demand-side weakness will limit upward inflation potential. Under this baseline scenario without external oil shocks, U.S. inflation in 2026 is expected to remain generally stable, with risks balanced between upside and downside. There is no strong motivation for a sharp increase or rapid decline, and overall inflation will fluctuate mildly. (Refer to the report “Will the Federal Reserve Yield to Political Pressure?”)

2. How does oil price influence U.S. inflation mechanism?

Oil prices mainly transmit to U.S. CPI through three channels: direct consumption, indirect costs, and inflation expectations, with overall transmission efficiency higher than in China.

First, the direct consumption channel: rising crude oil prices directly increase gasoline and energy consumption prices. As of January 2026, energy items (goods and services) account for 6.3% of the U.S. CPI weight, with energy commodities at 3.0% (mainly gasoline at 2.8%) and energy services (electricity, gas) at 3.3%. International oil price increases directly push up prices of refined products like gasoline and diesel, leading to a synchronized rise in all energy goods and services. Data since 2010 show that Brent crude oil prices have a correlation coefficient of 0.87 with U.S. gasoline retail prices (including tax), and 0.90 with the energy component of CPI.

Second, the indirect cost channel: oil prices efficiently transmit through the Producer Price Index (PPI) to CPI. As of December 2025, fuels and lubricants account for 17.2% of the U.S. PPI, with crude oil as a core raw material in industrial production. Price increases directly raise production costs. Since 2010, Brent crude oil prices have a correlation coefficient of 0.75 with YoY PPI, and PPI with CPI YoY is as high as 0.93. In contrast, China’s PPI and CPI correlation is only 0.33. This difference indicates that under the U.S. market competition and pricing mechanisms, firms are more able to pass upstream costs downstream, so oil price pressures on production quickly translate into consumer prices.

Third, the inflation expectation channel: oil prices shape market expectations, leading to self-fulfilling inflation. Since 2000, oil price levels (not just increases) have been highly correlated with various U.S. inflation expectation indicators, showing that U.S. residents and firms are highly sensitive to gasoline prices, and oil prices serve as a key indicator of inflation outlook. The U.S. has a mature inflation expectation quantification system, with surveys from Michigan University, the Conference Board, Atlanta Fed, New York Fed, and inflation-protected securities (TIPS) prices reflecting market expectations. These transparent, high-frequency data reinforce market behavior: firms preemptively raise prices, residents accelerate consumption, amplifying the effect of inflation expectations on actual inflation.

3. How does rising oil price specifically impact current U.S. inflation?

Statistical and causal analyses show significant correlation between international oil prices and U.S. CPI. Since 2010, the OLS coefficient between monthly YoY Brent oil prices and U.S. CPI YoY is 0.025, indicating a significant relationship. Based on the three channels above, this strong correlation largely reflects causality: oil price fluctuations substantially influence U.S. inflation. The model suggests that a 10% YoY increase in oil prices could raise U.S. CPI inflation by approximately 0.25 percentage points.

Given the high uncertainty in the development of the US-Iran situation and international oil prices, three scenarios are modeled: Brent crude prices in 2026 at $80, $100, and $120 per barrel, corresponding to YoY increases of 38%, 73%, and 107%, respectively. Based on the OLS model, the U.S. CPI YoY would rise to 3.4%, 4.3%, and 5.2%, respectively. In the second quarter of 2026, as the US-Iran conflict may persist and push oil prices higher, combined with low base effects, the upward pressure on U.S. inflation from oil prices will be more pronounced.

Regarding inflation expectations, the impact of rising oil prices will be more direct and rapid. The bond market’s inflation expectations have already risen with oil prices. From February 28 to March 9, 2026, Brent crude oil prices increased by $26 per barrel (37%), and the implied inflation expectation from 10-year TIPS increased by 9 basis points to 2.34%. U.S. residents’ inflation expectations also show upside risk: as of February 2026, Michigan survey indicates a 1-year inflation expectation of 3.4%. Based on the pattern observed during the 2022 oil price surge above $100, this round of oil price increases could push residents’ inflation expectations up by about 0.5 percentage points, further reinforcing the impact of expectations on actual inflation.

4. How does rising oil price affect U.S. economy, livelihoods, and politics?

(1) Economic growth: limited direct impact

2022 experience shows that oil price increases have a relatively mild direct impact on U.S. consumer spending and economic growth. After the Russia-Ukraine conflict erupted in February 2022, international oil prices remained above $100 per barrel from March to July, yet U.S. real personal consumption expenditures only declined slightly, and the economy did not enter a substantial recession.

The main reasons are twofold: first, fiscal policy support—large-scale stimulus measures like the American Rescue Plan in 2021 provided sufficient buffer for household income and spending, offsetting some expenditure pressures from high oil prices; second, the share of energy expenditures in household spending has systematically declined—post-shale revolution, energy (goods and services) accounted for about 4% of personal consumption, half of the 1970s-80s levels. Even if this rose briefly to 4.7% in 2022, it remains low historically, limiting the squeeze on consumer spending.

Looking ahead to 2026, these two factors—fiscal support (such as tax cuts) and declining energy expenditure share—may continue to buffer economic growth. However, a weak labor market, rising inflation risks, policy uncertainties, and stock market volatility will also increase downside risks, potentially widening the gap between consumer sentiment and GDP performance.

(2) Livelihood perception: significant confidence and sentiment impact

Although the direct impact on overall economic growth is limited, rising oil prices significantly affect U.S. consumer confidence and economic sentiment. During high oil prices in 2021-2022, the correlation between gasoline prices and Michigan consumer confidence index was -0.84, indicating a strong negative relationship: each increase in oil prices tends to lower consumer confidence.

A consumer survey published by NACS magazine in September 2025 shows that even though the average U.S. gasoline price had fallen from $3.38 to $3.17 per gallon in 2024, 79% of Americans said oil prices directly affected their perception of the economy. As of March 9, 2026, gasoline prices had risen to $3.63 per gallon, likely impacting living costs and sentiment, with consumer confidence probably weakening accordingly.

(3) Political landscape: midterm election pressures constrain policy choices

The inflation and livelihood pressures caused by rising oil prices may have limited short-term impact on Trump and Republican support, but long-term effects should not be underestimated. According to polling aggregator RCP, from February 28 to March 10 (after the US-Iran conflict erupted), President Trump’s approval ratings remained around 43.2%-43.5%, with no clear decline.

However, historical experience from the 2022 Russia-Ukraine conflict shows that under significant oil price hikes, President Biden’s approval initially rose slightly then declined over time. Within two months of the conflict, approval increased modestly, then continued to fall over the next eight months. This suggests that short-term geopolitical shocks may temporarily boost approval ratings, but prolonged high oil prices and rising living costs could eventually erode support, especially if the conflict persists.

As the 2026 U.S. midterm elections approach, inflationary pressures and public dissatisfaction driven by high oil prices and rising costs could become key factors limiting the Biden administration’s policy options. If the conflict sustains high oil prices and inflation, it could significantly increase the risk of midterm losses for Democrats. Rational decision-making suggests that the Biden administration should remain cautious about escalating conflicts that could further drive oil prices and inflation, especially regarding Iran.

5. How will the Federal Reserve respond?

After the US-Iran conflict and oil price surge, market expectations for Fed rate cuts in 2026 quickly adjusted downward, reducing the likelihood of multiple rate cuts this year but still expecting 1-2 cuts. According to CME data as of March 10, the probability of no rate cuts in the first half of 2026 increased from 43% before the conflict to 61%; the probability of more than two cuts in 2026 decreased from 48% to 18%, while the chance of one or two cuts rose from 48% to 66%.

The likelihood of rate cuts in the first half of 2026 has further diminished. On one hand, the inflationary pressures from rising oil prices are expected to be concentrated in the second quarter, and inflation data do not support rate cuts. On the other hand, Fed Chair Powell’s term ends before May, and during his tenure, the Fed is likely to maintain strong policy independence, adopting a cautious stance on rate cuts. The policy path in the second half of the year remains highly uncertain, influenced by the evolution of the US-Iran situation, international oil prices, inflation and economic fundamentals, and the new Chair Waller’s policy stance.

Historically, the ultimate impact of oil prices on U.S. inflation depends on the Fed’s policy response. During the 1970s-80s oil crises, inflation soared partly due to the Fed’s lack of independence and delayed response, leading to unanchored inflation expectations and persistent inflation. In contrast, the 2022 oil price surge had a weaker impact, partly because the U.S. reduced energy dependence and the Fed responded swiftly with large rate hikes to curb inflation, with strong support from the Biden administration.

Currently, the Fed’s independence faces unprecedented challenges, increasing the risk of inflation becoming unanchored. The Trump administration’s interventions have weakened the Fed’s independence more than usual, and in a “stagflation-like” environment with a weak labor market and rising inflation risks, continued pressure from the government to cut rates early, combined with Waller’s potentially compliant stance, could significantly raise the risk of inflation expectations becoming unanchored and actual inflation rising persistently.

For capital markets, the loss of the Fed’s ability and resolve to control inflation is more concerning than monetary tightening. If the Fed’s policy falters, the dollar assets could come under pressure, especially U.S. Treasuries and the dollar exchange rate, while a decline in dollar credibility and increased safe-haven demand could push gold prices higher. The global asset pricing framework would then need to be re-evaluated.

Risk warning: Geopolitical developments exceeding expectations, international oil price movements beyond forecasts, U.S. inflation exceeding expectations, and the Fed’s independence weakening more than anticipated.

Series of Overseas Macro Research Reports:

26. “Re-examining US-Iran Conflict: Future Directions and Impact on the Global Economy and Asset Prices” March 9, 2026

27. “Illegal Tariff Policies of Trump: How to View and Next Steps” February 22, 2026

28. “How Will New Fed Chair Waller ‘Steer the Ship’? Can He Maintain Independence?” February 2, 2026

29. “Will the Fed Yield to Political Pressure?” January 29, 2026

30. “2026 US Economic Outlook: Three Risks Behind Optimistic Expectations” January 14, 2026

31. “Review of the US Economy in 2025: Surface Resilience and Internal Fragility” January 9, 2026

32. “Outlook for 2026: The Path and Impact of Fed Rate Cuts” December 11, 2025

33. “US-China Kuala Lumpur Economic and Trade Negotiations: Outcomes, Remaining Issues, Future Directions” October 30, 2025

34. “US under Tariff War: Tariff Revenue, Effective Tax Rates, and Trade Pattern Evolution” October 13, 2025

35. “Resumption of Fed Rate Cut Cycle: Review, Outlook, and Impact” September 18, 2025

36. “Global Tariffs: Origins, Evolution, and Fiscal Contributions” August 11, 2025

37. “What Changes in Trump’s ‘Reciprocal Tariffs 2.0’? Why? Impact Analysis” August 6, 2025

38. “Next Steps in US-China Tariff Battles: Trump’s Confidence and Constraints” June 9, 2025

39. “US-China Mutual Tariff Reductions: Reasons, Unresolved Issues, Future Outlook” May 13, 2025

40. “Analyzing ‘Tariff War’ from a Strategic Perspective: Trump’s Strategy and Different Responses” April 28, 2025

41. “Reinterpreting Trump’s Logic: Three Principles and Five Recommendations for China” April 6, 2025

42. “Trump’s ‘Reciprocal Tariffs’ Exceed Expectations: Features, Impact, and Next Steps” April 3, 2025

43. “Reshoring of US Manufacturing: Drivers, Effects, and Outlook” February 10, 2025

44. “Trump’s First Move in ‘Tariff 2.0’: Causes, Impact, and Response” February 2, 2025

45. “Possible Scenarios and Impact Estimates of Trump’s ‘Tariff 2.0’ on China” January 24, 2025

46. “Trump 2.0: Cabinet Members’ Views and Impact on China—Diplomacy” November 28, 2024

47. “How to View Trump’s Announcement of 10% Tariff on China? Past Tariff Review and Future Path” November 26, 2024

48. “Trump 2.0: Cabinet Members’ Views and Impact on China—Economy” November 25, 2024

49. “‘Trump 2.0 Era’: Why the Revival? Impact and Response on China” November 7, 2024

50. “Pre-U.S. Election: ‘Trump 2.0’ vs. ‘Harris Surprise’” November 4, 2024

51. “Fed Rate Cuts Implemented: Where Are Global Assets Heading?” September 19, 2024

Analysts: Luo Zhiheng, License No.: S0300520110001, Email: luozhiheng@ykzq.com

Analysts: Fan Chengkai, License No.: S0300525120001, Email: fanchengkai@ykzq.com