Recently, global energy prices have been soaring.

Energy prices skyrocketed

Wholesale natural gas prices hit an all-time high again on Tuesday, rising to 213.09 pounds per megawatt hour at one point, closing at slightly less than 200 pounds per megawatt hour, compared with a 25-fold increase in European natural gas futures prices at just 8 pounds per megawatt hour in May 2020.

After the economic impact of the epidemic faded further, market demand continued to grow, and even at the end of the traditional off-season of energy consumption in the summer, natural gas prices continued to rise instead of falling.

The same is true of oil prices. Oil prices have been on an upward trend since their low in April 2020. On Tuesday, WTI crude oil futures surged to $80.75, the highest level since October 2018, a fivefold increase from the April 2020 low, while WTI crude oil futures hit a record high of $76.67 since July, with an even more exaggerated increase from the April 2020 low of $40.32.

American inflation may not be "temporary"

Previously, the Fed has been claiming that high inflation is temporary.

But higher energy prices will lead to cost-driven inflation. The price of energy products located in the upper reaches of the industrial chain rises to a certain extent, which will lead to a substantial increase in production costs and indirectly lead to the improvement of a series of price levels such as goods and services. Especially in the current situation of strong market demand, if enterprises reduce the supply of their products, product prices will certainly rise, which will lead to inflation.

The chart below shows the annualized rate of the US PCE price index, which is the inflation data that the Federal Reserve is most concerned about. As can be seen from the chart, US inflation has soared from a low of 0.5% in April 2020 to 4.2% now, an increase of 7.4 times! In terms of time, it also coincides with the time when oil and gas prices began to rise.

Hinder economic recovery

The rise in energy prices will lead to a rise in prices, resulting in the inability of prices to optimize the allocation of resources, increasing risks in the economy, increasing the uncertainty faced by market participants, and increasing the cost of market economic activities as a whole. it will also shrink economic activity, thus slowing down economic growth.

Earlier, the Fed had publicly acknowledged that the economic recovery was slowing. The US economy "slowed slightly" in August, with another surge in the number of new cases hitting catering, travel and tourism, the Fed said in its beige book. The economy as a whole still faces rising prices after the pandemic, labour shortages and weak recruitment.

Moreover, previous weak employment reports, retail sales data and consumer confidence data all hinted at a slowdown in the US economy.

The Federal Reserve is about to take action

Although the Fed has long claimed that inflation is temporary, the recent slowdown in inflation growth suggests that inflation may peak. But if energy and other commodity prices continue to soar and the Fed does not take action, US inflation will continue to rise.

The northern hemisphere will soon enter a cold winter, the market demand for energy will soar, it is believed that energy prices will remain strong. The inflationary pressures facing the Fed will increase.

Powell, chairman of the Federal Reserve, hinted that he would begin to scale back asset purchases in November, while the bitmap showed that nine members expected the Fed to start raising interest rates in 2022, accounting for half of the total. Six of them are expected to raise interest rates once in 2022, and three are expected to raise rates twice in 2022. All but one are expected to start raising interest rates in 2023, compared with 13 in June this year.

The Fed has begun to act, although Powell has always claimed that raising interest rates has nothing to do with cutting, but with the reduction coming, will the rate hike be far behind?

Not only the Federal Reserve, but also the Biden administration has repeatedly asked OPEC+ to expand oil production and lower oil prices, but with little effect.

The last straw that crushed American stocks?

For years, the US stock market has been in a bull market. Even the outbreak has failed to stop the bull market in US stocks. This is mainly due to the Fed's ultra-loose monetary policy and the huge fiscal stimulus of the US government. However, with high inflation dragging down the recovery of the economy, the Federal Reserve is about to embark on the road of monetary normalization, and US stocks have recently begun to show a large correction, which may be the last straw to crush US stocks.