By Megan Leonhardt

Consumers may not be feeling the effects of rising crude oil prices yet when they pay at the pump, but the uptick could start appearing in the next round of inflation data.

Oil prices have been on a tear since the start of the year, with Brent crude hitting $80 a barrel on Monday. And West Texas Intermediate $(WTI)$ crude oil, the benchmark for the U.S. market, was up 2% -- over $78 a barrel.

"There's no question that, so far in 2025, we've seen some significant increases," said Tom Kloza, global head of energy analysis at OPIS.

But retail prices have moved slowly in response to more volatile wholesale crude prices, he added, due in large part to a healthy U.S. refining capacity.

The average cost of a gallon of gasoline is just $3.07 as of Monday, according to AAA. That's only up about 4 cents from a month ago.

Diesel, jet fuel, and heating oil, however, have all moved up significantly so far in 2025, up as much as 18 cents per gallon in some cases. And that could have an impact on household heating bills, airlines, and transportation services that are factored into the inflation measures such as the consumer price index. The Bureau of Labor Statistics is slated to release the latest data for the December CPI on Wednesday.

Given pump prices and taking into account the seasonality of gasoline demand, Conrad DeQuadros, senior economic advisor at Brean Capital, expects that seasonally adjusted CPI gasoline prices will be reported up 4.5% month over month in December. This will add 0.1% point to the monthly change in the overall CPI, he adds. Economists surveyed by FactSet expect headline inflation rose 2.9% year over year in December, up from the 2.7% pace measured in November.

But rising retail and wholesale fuel costs are only the primary effects of higher energy prices -- the second-round effects could prove more widespread. This could include freight transportation and fuel surcharges -- as well as higher food costs, which are already elevated thanks to issues such as avian influenza.

"The higher energy prices are likely to be passed through [to consumers] to a great extent," DeQuadros said. Higher oil prices, for example, could be passed onto consumers in the form of higher airfares.

Rising consumer expectations could be another potential headwind for inflation -- particularly if prices at the pump tick up enough to raise concerns for everyday Americans. Already, the latest University of Michigan sentiment survey released Friday showed that both year-ahead and long-run inflation expectations rose markedly over the past month. The expectations for longer-term inflation rose to 3.3% this month from 3.0% in December -- the highest since June 2008.

"Rising expectations will be unhelpful for getting inflation down," DeQuadros notes.

Federal Reserve officials, for example, have repeatedly credited well-anchored consumer inflation expectations as a driver of their soft-landing scenario. If that should falter, it could ratchet up inflationary pressures.

That said, consumers are likely to see higher prices on gasoline front-loaded in the first half of 2025 and then see a slowdown start to kick in around the summer months. This isn't a situation where oil-price inflation proves to be insidious and continues to affect both retail and wholesale prices for longer durations, Kloza said.

"The highest prices are going to occur perhaps early in the first quarter, and there will be a lot of price relief as the year goes on," Kloza said, noting that non-OPEC production is expected to increase in the U.S., Canada, Brazil, and Guyana and likely take the pressure off prices.

So what consumers pay at the pump on April Fools' Day may be considerably higher than what they pay on July 4, he adds.

Going forward, Nationwide's chief economist Kathy Bostjancic said economists, consumers, and investors will need to keep a close eye on oil prices, but so far, the situation doesn't look likely to translate into meaningful and sustained increases at the pump.

Louis Navellier, founder and chief investment officer of asset manager Navellier & Associates, agrees, calling the recent increase in crude oil "just temporary." Navellier said he doesn't expect crude oil prices to surge beyond $85 per barrel, particularly under President-elect Donald Trump's policies.

Additionally, Navellier points out that a strong U.S. dollar is actually deflationary for commodities and that may show up to offset any energy increases in the producer price index wholesale goods component set to be released on Jan. 14.

Write to Megan Leonhardt at megan.leonhardt@barrons.com

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January 14, 2025 01:00 ET (06:00 GMT)

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