Energy, Inflation, and Markets in an Uncertain World

Jeffrey Roach (00:04):

Hi, I am Jeffrey Roach, Chief Economist for LPL Financial, and in this edition of the Econ Market Minute, I'll share a few important factors worth watching during these periods of uncertainty. First, energy prices are set at the margin. Energy markets are marginal price markets. That just means prices are often driven by the last unit of supply needed to balance demand rather than by average production costs, such as a relatively small disruption such as an outage at a key refinery. Conflict affecting a shipping lane or an unexpected surge in demand can all set prices for the entire market. Why does this matter? It helps explain why oil and gas prices can spike even when global inventories look adequate and why energy driven inflation shocks can rattle inflation and growth prospects almost immediately and can feel somewhat disconnected from broader economic fundamentals. Second, energy is both a growth input and an inflation catalyst.

Jeffrey Roach (01:04):

Energy is unique because it simultaneously is a key input for economic growth, fuel, electricity, transportation, and a direct driver of inflation. So rising energy prices can boost headline inflation quickly, while also acting as attacks on consumers and margins. For businesses falling, prices can do the opposite and not symmetrically. So the latest reading we have on inflation is from the March CPI report, and excluding food and energy, that's the core number. Inflation rose 2.59% from a year ago. Now, this was not a surprise that was a little bit of an uptick from last year, but we need to be careful about the second order effects from the oil supply crisis. We expect inflation to ease later this year, but since inflation is running on the hotter side, we expect the Fed to keep interest rates unchanged for the next several meetings as long as the labor market holds.

Jeffrey Roach (01:58):

Third, natural gas expected to overtake petroleum in 10 years. As of 2025, petroleum was roughly 40% of total fuel consumption. With Nat Gas taking up roughly 35% of total fuel consumption in the next several years, we could see a rotation between these two types according to the EIA. And the key takeaway from the outlook is total energy consumption remains largely flat with greatest growth in the purchased electricity sector. As data center loads are the dominant driver of long-term electricity growth. Now that's all for now. If you want more insights on global market trends, follow us on social media and take care.