Key Highlights

● Energy prices jumped in September and gasoline climbed even more steeply.

● The spike was the main reason headline PCE Inflation accelerated from August.

● WTI settled at $102.00 and Brent at $114.88 on Thursday.

● US crude stocks fell by 1.9 million barrels while gasoline stocks rose 3.9 million.

Fuel prices delivered the biggest inflation punch in September's PCE report, as conflict in the Middle East kept Crude Oil above $100 a barrel.

The pump-price shock

Drivers felt it before economists measured it. September's personal consumption expenditures data, released Thursday, October 29, showed energy prices jumping during the month and gasoline prices climbing even more steeply, according to one report. That report tied the surge to a war-related oil squeeze.

The spike was the main reason headline PCE inflation accelerated from August, according to market data, outpacing the more modest uptick in core inflation.

Why oil is so expensive

The answer lies in the Middle East. The oil market has been gripped by conflict involving Iran, with repeated threats to tankers, shipping lanes and energy infrastructure.

On Thursday alone, media reports said Iran's Revolutionary Guard said three tankers had hit sea mines south of the Strait of Hormuz, and that Houthi strikes had hit Saudi energy facilities. One research firm said in a note that "threats to regional infrastructure remain active despite the renewed push for negotiations."

Brent crude recently hit a four-year high, and WTI has held above $100 a barrel since the week of October 23, according to market commentary. On Thursday, WTI settled at $102.00 and Brent at $114.88, according to media reports.

The refining squeeze

Crude prices are only part of the story. Gasoline and diesel depend on refining capacity and product inventories, and those markets have their own pressures.

Russian fuel supplies are a wild card. "There are mixed signals coming from Russia about what they are going to do," said one energy analyst, according to media reports. A bank note observed that "The silence has allowed Russian refinery runs to rebound by 350,000 barrels a day last week."

Inventories are shifting too. The Energy Information Administration reported that US crude and distillate stocks fell, while gasoline stocks rose, according to media reports. Another source put the crude draw at 1.9 million barrels and the gasoline build at 3.9 million barrels.

From the pump to the Fed

Energy costs flow directly into headline inflation, but they can also spread. Higher diesel prices raise shipping costs for goods, and higher jet fuel prices lift airfares. Businesses facing higher energy bills may raise prices elsewhere.

That is why the Fed is paying attention. Chair Kevin Warsh said on Wednesday that Americans are "still dealing with inflation that has been running above the committee's objective," according to media reports. One Wealth advisor said Thursday's data "strengthens the case for another rate increase in December," according to market commentary.

Consumers kept spending anyway

Despite the energy shock, households did not pull back. The third-quarter GDP report showed consumer spending holding up strongly, according to market data, and the economy accelerating sharply from the second quarter.

Markets were mixed on the day. The S&P 500 slipped 23.59 points to 7,720.39, and the energy sector dipped at midday as oil trimmed some of its war premium, according to market data. The Russell 2000 rose 28.71 points to 2,859.22.

What to watch

The path of gasoline prices depends heavily on diplomacy. Vice President JD Vance sent a letter to Mohsen Rezaei, head of Iran's Supreme National Security Council, according to media reports, reviving hopes for talks. But an Iranian official called a Qatari draft deal "unacceptable," and oil traders are pricing the risk of a US strike on Iran after the November 3 midterms.

If crude stays above $100, energy will keep pushing up headline inflation. The gasoline inventory build reported this week could offer some relief at the pump, but only if Supply disruptions do not worsen. Friday's Employment Cost index will show whether energy-driven inflation is starting to influence wages.