The Federal Reserve's next interest rate increase could come as early as October as higher oil prices threaten to push inflation farther away from the US central bank's 2% goal, Oxford Economics said in a report e-mailed Tuesday.
Oxford has raised its projections for oil prices, factoring in risks to oil shipments via the Red Sea at a time when the Strait of Hormuz remains effectively closed.
Elevated oil prices, along with tight supplies of refined products such as gasoline and diesel, will likely result in a stronger pass-through to core inflation in the coming year, Oxford Chief US Economist Michael Pearce said.
"Shifting inflation risks and the more hawkish tone from the Fed prompted changes to our rate outlook," Pearce wrote. "We expect another rate hike in December, but the risks are there's a hike in October as well."
Last week, the Federal Open Market Committee unanimously decided to lift the policy rate for the first time in just over three years to combat sticky inflation. At the same time, the committee signaled another hike later this year.
Markets are currently pricing in a 55% probability that the FOMC will hike again by 25 basis points in October, with the remaining odds in favor of a pause, according to the CME FedWatch tool.
Deutsche Bank recently said it expects the Fed to lift interest rates by quarter percentage points in each of December and March, though it flagged the possibility of a hike in October if recent data trends continue.
"We now forecast inflation will rise further above the (Fed's) 2% target in the near term," Pearce said. "The risks are tilted toward more hikes in the near term. The Fed isn't solely focused on higher inflation, but also on the persistent upside risks."
Under its "sustained disruption" scenario, Oxford sees West Texas Intermediate crude oil averaging close to $103 a barrel in the last quarter of this year and staying above $80 through the end of 2027.
The average price of diesel in the US hit a fresh record high of $6.5276 per gallon on Tuesday, according to data from AAA, a travel organization that tracks fuel prices nationwide. Regular gasoline eased to $4.4750 per gallon from Monday's $4.4786, but has surged from the year-earlier average of $3.1843.
Oil prices were mixed on Tuesday but were on track for their third consecutive monthly gains.
Markets were evaluating signs of renewed hopes for the Strait of Hormuz's reopening. There were also reports Tuesday that Saudi Arabia was set to resume oil exports via its key East-West pipeline that was shut as a precautionary measure following drone attacks.
