### Spike in Oil Prices Raises Inflation Concerns Amid Middle East Tensions

Recent uncertainty in the crude oil market raises alarms over potential inflation impacts as energy costs surge. Prolonged high energy prices could drive up input costs for a wide range of goods and services, leading to broader price increases. Senior Markets Economist James Reilly from Capital Economics commented on Tuesday's price surge, stressing that much remains uncertain.

Reilly pointed out that the outcome hinges on the scale of the attacks and the extent of any damage, particularly in civilian areas. "A significant escalation by Iran risks US involvement in the conflict," he added, suggesting that Tehran would likely aim to avoid drawing the US into the fray. Reilly emphasized that oil prices will be the main vehicle through which these events affect the global economy, noting that Iran contributes nearly 4% of the world's oil output. He suggested that Saudi Arabia's possible increase in production could be an important factor should Iranian supplies be disrupted.

According to Reilly, a 5% rise in oil prices typically adds about 0.1 percentage points to headline inflation in advanced economies such as the United States. However, he argued that a substantial and prolonged increase in oil prices would be necessary to influence central bank policies.

The energy sector, represented by the Energy Select Sector SPDR Fund (XLE), led Tuesday's market action, rising approximately 1.8%. Utilities (XLU) also saw a 0.4% increase, bolstered by recent gains associated with the boom in artificial intelligence and as a defensive measure against potential economic downturns. Conversely, the technology sector struggled, with the Nasdaq Composite dipping nearly 2% in afternoon trading. Tech giants Apple (AAPL) and Nvidia (NVDA) were notable losers, each dropping over 3%.

A separate development added to economic uncertainty – a strike by dockworkers initiated on the East and Gulf Coasts on Tuesday morning. This strike poses a threat to halt half of the US's ocean shipping, potentially costing billions of dollars per day. However, Raymond James Chief Economist Eugenio Aleman predicts that the strike will not add to inflation due to already softening consumer demand and an expected cooling in shelter costs, despite occurring ahead of the critical holiday shopping season and elections.

Oil prices surged in response to headlines about Iran's impending missile strike against Israel. West Texas Intermediate (WTI) crude climbed about 3%, trading above $70 per barrel. Brent crude, the international benchmark, also increased roughly 2%, nearing $74 per barrel. A senior White House official confirmed that the US has indications of an imminent ballistic missile attack by Iran against Israel, and that defensive preparations are underway.

Geopolitical tensions have escalated recently as Israel conducted ground raids in southern Lebanon, targeting the Iran-backed militant group Hezbollah. The potential conflict, combined with mixed economic data released earlier, negatively impacted stock markets, with the technology-heavy Nasdaq experiencing significant declines.

As these events unfold, their impact on oil prices and inflation continues to be closely watched.