Two-Fold Economic Risks Become Apparent

Federal Reserve Faces Tough Choices Amid Rising Oil Prices

The Federal Reserve currently finds itself in a challenging position. This week, West Texas Intermediate (WTI) crude oil prices surged past $90 per barrel, as shown in Chart 1. This spike is expected to trigger a significant inflationary impact in the coming months.

In response, our projection for WTI oil prices in 2026 has been increased by 15%, bringing the average estimate to $69 per barrel. Consequently, our outlook for annual CPI inflation has risen to 2.7%, which is 0.3 percentage points higher than last week's prediction. Additionally, forecasts for core CPI and core PCE inflation have each been adjusted upward by 0.1 percentage points, reaching 2.6% and 2.8% respectively for this year.

The Fed, which is increasingly cautious about the possibility of missing its inflation target for another year, remains highly attentive to incoming economic data.