Investor sentiment worldwide is positive, especially in AI-led Asia

Sectoral shift in US job openings

Meteoric rise in AI-related semiconductor exports fueling South Korea's export boom

Regional Fed surveys showing further manufacturing acceleration in August

Sharp drop in China demand for oil helping to limit impact of Middle East conflict on the price

Decades high real price of copper posing physical challenge to investment boom

Rising US long-term real yields point to strong demand for investment funding

US retail sales accelerate even as consumers remain gloomy

Retail gasoline price still well above pre-conflict level and now rising again

PMIs showing widespread revival of global economy

Crude oil price has returned to pre-conflict level but traffic through Hormuz still subpar

Surging orders for computers and electronics propelling durable goods orders

Next year's inflation forecasts are on the rise and above target

Disrupted global supply chains placing upward pressure on US goods prices

Construction of data centers has overtaken transportation construction in US

Elevated energy prices putting intense upward pressure on input prices around the globe

US is big leader in global surge in private AI investment

Larger-than-usual income tax refunds this year are supporting consumer spending

Sharply rising share of AI-related jobs

Inflationary impact of surge in oil prices larger in Europe than in the US

Futures market thinks the price of oil will recede significantly over the next six months

Recent pickup in US defense orders could help support overall growth ahead

Cost of transporting crude oil has soared to series high

Market-based inflation expectations have not yet reflected recent surge in oil prices

Global equity markets are fearing a major economic disruption from soaring oil prices

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Andrew Cates

The latest round of inflation releases will help determine what central banks do next. A larger question lies behind the monthly numbers. Has inflation once again become more responsive to economic pressure? For much of the decade after the global financial crisis, falling unemployment generated surprisingly little inflation. That apparent flattening of the Phillips curve, the relationship between economic slack and inflation, encouraged policymakers to believe that economies could run hot at relatively little cost. Evidence since 2020 suggests that assumption is now less secure.

This argument complements, rather than overturns, the analysis in [The age of abundance is over](https://www.haver.com/articles/the-age-of-abundance-is-over-and-neither-policy-nor-markets-have-caught-up). That article argued that today’s inflation overshoot largely reflects scarcer labour, energy and productive capacity, none of which higher interest rates can directly replace. The evidence considered here makes a separate point. Even if supply constraints explain much of the current level of inflation, additional demand may now pass into prices more readily than it did in the 2010s. The source of inflation and its sensitivity to demand are related questions, but they are not the same question.

**The evidence from the United States**
The US provides the clearest example. Comparing a real-time measure of economic tightness with inflation one year later reveals a marked break after 2020. Before then, a one-standard-deviation rise in the tightness measure was associated with an increase of about 0.4 percentage points in subsequent inflation. Since 2020, the estimated response has been roughly four times as large, at about 1.7 percentage points (Figure 1). Put simply, inflation now appears to react more strongly when demand presses against the economy’s capacity.

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Figure 1. US economic tightness and inflation one year later, before and since 2020. Source: ISM and BLS via Haver Analytics.

This may have contributed to the decline in US CPI inflation from 9.1 per cent in June 2022 to around 3 per cent by mid-2023 without the recession many forecasters had expected. The easing of supply disruption was also crucial. A steeper relationship means that the demand-driven part of inflation can fall materially when economic pressure eases only modestly. It does not mean that supply-driven inflation can be eliminated without significant economic cost.

The relationship has also changed over time. It was comparatively firm during the expansion of the mid-2000s, flattened as spare capacity opened after the financial crisis, and steepened sharply after 2020 (Figure 2). This pattern suggests that the Phillips curve may itself depend on the state of the economy. Inflation responds weakly when capacity is abundant, but more strongly when labour, energy and supply chains are constrained. A sufficiently large downturn could therefore flatten it again.

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Figure 2. Rolling seven-year estimate of the US response of inflation to economic tightness. Source: ISM and BLS via Haver Analytics.

**Evidence beyond America**
Two objections arise. The first is that the result is peculiar to the US. The second is that it merely captures the pandemic supply shock. Neither explanation is sufficient on its own. Labour-market pressure can be measured using vacancies relative to unemployment, while supply-chain pressure and energy inflation can be controlled for directly. On that basis, inflation has become more responsive to labour-market tightness since 2020 in the US, UK, Japan and Canada (Figure 3). The controls explain a substantial part of the change, confirming the importance of supply disruption, but they do not eliminate it.

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Figure 3. Estimated response of inflation to labour-market tightness, controlling for supply-chain pressure and energy prices. Source: BLS, ONS, Japan MHLW, StatCan, New York Fed and OECD via Haver Analytics.

The estimates should be treated with care. The post-2020 samples are short, and the euro area cannot be included because it lacks a comparable vacancy series. Even so, a similar shift across four different labour markets is harder to dismiss than an isolated US result. It suggests that the forces which kept inflation unusually insensitive to domestic pressure in the 2010s have weakened across much of the advanced world.

**Why the relationship changed**
Scarcity offers a plausible explanation. The global labour supply is no longer expanding as readily, energy has become more expensive and less dependable, and fragmented trade and production networks provide less capacity to absorb an increase in demand. In this environment, extra spending is more likely to encounter a physical constraint and raise prices. Artificial intelligence could eventually expand productive capacity and flatten the relationship again. For now, however, its data centres, electricity requirements and financing needs are adding to demand for scarce resources before the full productivity benefit has appeared.

**Implications for monetary policy**
A steeper Phillips curve restores some potency to demand management, but only against the inflation generated or amplified by excess demand. Higher interest rates cannot produce energy, repair supply chains or expand the workforce. They can prevent supply shocks from being reinforced by excessive spending, wage pressure and rising inflation expectations. This distinction matters when central banks decide how forcefully to respond to an inflation overshoot.

The policy lesson is therefore more demanding than a simple case for tighter money. Central banks have less room than they did in the 2010s to assume that strong employment will have little effect on prices. Yet forcing supply-driven inflation down through weaker demand alone could impose a substantial cost in output and jobs. Policymakers must judge both where an inflation shock originated and whether domestic pressure is propagating it.

The financial-market consequences follow from the same uncertainty, although they are secondary to the policy issue. If inflation responds more strongly to economic pressure, interest-rate expectations are likely to move more sharply with incoming data, and government bonds may provide less reliable protection during inflation shocks. The central conclusion, however, concerns the economy itself. The decline in inflation after 2022 was unusually benign, but it should not be treated as proof that future episodes will be equally painless. In an age of scarcer supply, demand management matters more, while the limits of what it can achieve have become more apparent.

_Methodology: US estimates relate CPI inflation one year ahead to a real-time slack measure based on ISM supplier deliveries, order backlogs and unemployment. Cross-country estimates relate CPI inflation to vacancies divided by unemployment, controlling for the New York Fed global supply-chain pressure index and energy inflation. Post-2020 samples are short. Data via Haver Analytics._

The End of Painless Disinflation

Shashwat Indeevar

In recent months the maritime supply chain of oil and petroleum, especially via the Middle East, has come under immense strain. The ongoing disruptions to sensitive maritime chokepoints make the economics around it increasingly precarious. The Strait of Hormuz has been heavily restricted since March 2, 2026 and as of August 30, 2026 remains effectively closed. According to the EIA, prior to the conflict roughly a fifth of global oil consumption and LNG trade flowed through this chokepoint. There was a partial opening that lasted from June 17, 2026 to July 14, 2026. More recently on July 20, 2026 Yemen’s Houthi movement declared a naval blockade and maritime embargo on Bab el Mandeb strait. Together, the two disruptions have exposed the limited scope for rerouting and increased the risk of a more persistent energy-price shock. In this piece, we examine their impact on tanker shipping routes and Saudi Arabia’s oil trade, using IMF PortWatch data available in Haver’s **TRANSPRT** Database.

**A closer look at chokepoints: Limitations of rerouting**

In the month following the closure of Strait of Hormuz, tanker trade volume through Hormuz collapsed to 22.8 thousand tons from 1.97 million tons over the previous 30 days.  This difference in lost volume was not absorbed by the aggregate of the remaining chokepoints – Suez Canal (Egypt), Bab el Mandeb (Yemen) and Cape of Good Hope (South Africa) – as the net volume through the alternate corridor remained nearly steady and has actually begun to fall off in the latest month (Figure 1 Blue line).

There were some significant gains made during the partial reopening from June 17 to July 14, where Hormuz tanker volume regained 29.5 percent of its original value.  However, the Houthi blockade (July 20) triggered a second, compounding decline, this time visible on all three lines (Figure 1). Hormuz dropped again, and the alternate corridor (which had shown slight gains at that time) dropped as well. These were not two independent shocks; the second disruption hit the very route ships had been relying on to cope with the first.

The US has maintained a strong naval presence in the region and has led Operation Prosperity Guardian, a multinational coalition set up in December 2023, which aims to protect commercial shipping in the Red Sea. The challenge is the asymmetry of the threat from the Houthis: cheap drone and missile attacks on tankers and naval escorts are hard to fully deter, so even a partial or a threatened blockade has proven effective.

260908SI1.jpg

**Impact on Saudi Arabia: Tanker Port Calls and Tanker Exports Tonnage**

Saudi Arabia is at the center of these disruptions. Oil exports made up roughly 70-80 percent of its total export value over the past year. After the closing of the Strait of Hormuz, Saudi Arabia was able to reroute a share of its crude exports away from the Persian Gulf to the western Red Sea via its overland east-west (Petroline) pipeline. Breaking down the port calls and tanker export tonnage by the east-west ports during different phases of the chokepoint closures using the IMF PortWatch data shows the extent to which Saudi Arabia was able to manage the shock.

260908SI2.jpg

260908SI3.jpg

During the first 30 days of the closure of Hormuz, the average port calls per day on the western ports (Red Sea) increased to 2.9 per day from 2.6 per day (11.4 percent increase), whereas the eastern ports (Persian Gulf) decreased to 8.4 per day from 12.0 per day (29.8 percent decline) (Figure 2). Meanwhile, the export tonnage on the western ports increased only 0.7 percent and on the eastern ports decreased by 43 percent (Figure 3). The disproportionate changes, especially on the east coast (Persian Gulf), show that not only were fewer ships arriving but they were carrying less cargo as well. This shows that the Petroline did offer some flexibility, but was not enough to offset the loss of eastern export capacity. A more severe decline was seen on both coasts after the Houthi blockade.

**Impact on Arabian Light Crude Oil Price**

Due to supply scarcity through Hormuz, markets initially responded by driving up oil prices from $66 to $121 per barrel (Figure 4). This initial windfall helped Saudi Arabia offset its physical loss in trade volume with financial gains. Over the following months, prices fluctuated as alternate shipping routes and partial supply adjustments took hold, easing to around $97 during the interim reopening, which was well above pre-crisis levels. Notably even after the reopening ended, the price settled at $88 a barrel. However, it is unlikely this stability will continue as we start seeing the full effects of the Houthi blockade, which reintroduces the scarcity dynamic that led to the initial price spike.

260908SI14.jpg

Current energy demand has to be met, and the only short-term solution is a diplomatic resolution, as seen during the partial reopening of Hormuz. Otherwise, prices will likely be driven up, as evident after the first Hormuz closure, or at the very least remain highly sensitive to disruptions, causing fluctuations.

Such sustained energy-price volatility affects more than just Saudi Arabia's trade balance. Higher and less predictable energy prices push up inflation worldwide, raising costs for transportation, manufacturing, and shipping. This in turn slows down economic growth. If these chokepoints remain contested and viable alternatives, such as shipping routes or energy sources, aren't established, the risk isn't a one-time price shock, but a higher, more volatile energy baseline for the global economy.

The Economics of a Chokepoint Crisis

Ethan Harris

The employment report confirmed that the labor market is roughly in equilibrium. Now focus shifts to the August inflation data. I think a rate hike is quite likely on the 15th if the August data either match or exceed consensus forecasts.

**In times like this, data dependence make sense**

The Fed is often criticized for being too “data dependent.” Critics argue that tying policy to upcoming data: (1) makes the Fed backward looking, (2) adds to volatility as markets over-react to each release, and (3) signals the lack of a fundamental framework.

I disagree. After a period of hawkish or dovish news, there is always a period of high data dependence. At that stage incoming data becomes the final straw. In this instance high and rising inflation (chart) has created a strong focus on the August inflation data. After 65 months of above-target inflation, every member of the FOMC wants to hike if inflation does not return to target in a “timely manner.”

260904EH1.jpg

**The tipping point**

The million-dollar question is what constitutes a “timely” return to target and what reading in August would confirm or contradict that goal?  The best approach is to look at August inflation readings relative to consensus forecast. If the numbers are below consensus, the doves will have an argument to stand on and may get enough support to stay on hold. However. If they come in above consensus, it is game over: doing nothing would damage credibility. Indeed, now that the FOMC has put us all on high alert, even consensus-like numbers should be enough to trigger a hike.

**I’m sticking to my forecast**

Of course, in any given month anything can happen. However, my fundamental view is that inflation will remain sticky high. The labor market may be in equilibrium, but the overall economy seems hot, with GDP running persistently above estimates of potential output (chart). Monetary policy is loose, judging by easy financial conditions (and, incidentally, accelerating money growth). The evidence is growing that the neutral funds rate is around 4%, not 3%. Fiscal policy is easy.

Outside of the neutral signals from the labor market, leading indicators of consumer price inflation signal strength. The PPI is strong. Survey measures of input and output prices remain robust and supplier delivery times as slowing. There is likely more pass through from high energy prices and tariffs. The AI build out is far from over. The Cleveland Fed’s Inflation Nowcasting tool has core PCE accelerating to 3.4% in August and 3.5% September.

It doesn’t look like “mission accomplished” to me. I continue to see a high probability of a September hike and another hike in December.

260904EH2.jpg

Source: CBO, BEA and author’s calculation

No mas: the Fed and Inflation

Viewpoints: December 2024

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