A prolonged oil shock could keep consumer prices elevated and complicate the path for central banks already navigating a difficult policy environment

Oil's return above $100 a barrel puts inflation back at the center of Wall Street's concerns

Global oil prices rose above $100 a barrel on Wednesday for the first time in seven weeks, reviving concerns about global energy supply disruptions and a fresh inflationary shock just as major central banks prepare to make key interest-rate decisions later this month.

Brent crude's contract for November delivery (BRN00) (BRNX26) climbed 3.3% to $101.18 a barrel in morning trading. The international benchmark is on track to settle at its highest level since July 24. Meanwhile, West Texas Intermediate's October contract (CL.1) (CLV26), the U.S. benchmark, also advanced 3.5% to $96.26 a barrel, its highest level since the beginning of June, according to FactSet data.

Both Brent crude and WTI contracts are now up over 60% since the start of the year, and about 10% so far this month.

"Brent breaking above $100 is a major psychological milestone for markets, but the bigger concern is what this means for inflation," said Lukman Otunuga, head of market research at FXTM. "A prolonged oil shock could keep price pressures elevated and complicate the path for central banks that are already navigating a difficult policy environment."

The surge in crude prices has lifted gasoline and diesel prices, adding to inflationary pressure from higher energy costs and threatening to reduce the purchasing power of consumers.

Gasoline prices across the country averaged $4.2245 per gallon as of Wednesday, up 10 cents a gallon in the past week - up more than $1 a gallon in the past year. The national average price for a gallon of diesel has hit a record high of $5.94, according to data compiled by AAA. Diesel matters to U.S. consumers because it powers the trucks, trains and farm equipment that transport nearly all everyday products and food to American households.

Worries about what rising oil prices mean for interest rates have helped drive up the yield on the benchmark 10-year Treasury note BX:TMUBMUSD10Y to the highest rate seen since October 2023. The yield guides rates on many consumer loans, such as home mortgages.

Wednesday's rally in oil prices came after the U.S. Central Command announced late Tuesday that it attacked five Iranian crude-oil vessels - four in the Gulf of Oman and one near Kharg Island, where 90% of the country's oil exports are handled - and said Iran's Revolutionary Guard Corps targeted a U.S. Navy warship with ballistic missiles twice in the last two days.

Tehran said it responded by launching strikes at a U.S. military base in Jordan, eight ships - including two U.S. Navy vessels - and eight oil tankers it claimed were attempting to pass through a "prohibited and unsafe" part of the Strait of Hormuz.

"With Brent now up more than 60% year-to-date, renewed security concerns around the Strait of Hormuz are tightening the market's focus on supply fragility, energy pass-through and the return of stagflation risk," Patrick Munnelly, market strategist at Tickmill Group, wrote in a note Wednesday.

It also followed Saudi Arabia-based Saudi Aramco halting operations at some of its oil refineries in the country after Yemen's Houthi rebels attacked energy and civilian sites in Jazan, Najran, Abha and Khamis Mushait, wounding 73 people. The group accused Saudi Arabia of attacking a prison in Yemen's northern city of al-Hazm on Monday, killing seven people, including one child.

What seems to matter more to the broader market is the path for inflation, as investors await the release of the consumer-price-index report for August on Friday.

The recent uptick in oil prices this week makes the U.S. inflation data, due out on Friday morning, particularly important, said Otunuga of FXTM. "Markets are effectively being pulled in two directions - higher energy prices are strengthening the case for tighter policy, while softer underlying inflation could give central banks a reason to remain cautious."

"The data this week could determine which narrative wins," he added.

Fed-funds futures traders were pricing in a 39% chance of a 25-basis-point hike by the Federal Reserve next week, down from over 60% last week, according to the CME FedWatch Tool.

-Isabel Wang -Nora Redmond