US CPI inflation rises as Iran war drives up fuel prices: How higher petrol and diesel costs could hit American households

US homes now have less disposable income owing to higher prices of petrol and diesel. It affects more than just fuel for the vehicle. Expensive fuel can make commuting costs higher, add to the price of delivering products like groceries, and even add to airfares, leaving Americans with less cash for other purchases.

Consumer price inflation in the US climbed to its fastest rate since May in September, going above expectations of economists, reports AFP. The Consumer Price Index (CPI) gained 3.7%, up from 3.4% in August, and above the expected rate of 3.6%, says MarketWatch. In monthly terms, inflation also rose from 0.4% to 0.6%.

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Increased prices for gasoline were one of the key reasons for the rise in price levels in the month. The statistics arise in view of the tensions between the United States, Israel and Iran, which affect the world energy markets.

According to AFP, the tensions in the Strait of Hormuz, which is an important route for oil and gas transportation across the world, have added to the pressures on energy prices. The rise in prices poses additional difficulties for people who have to deal with credit rates and other costs of living, as well as increasing the economic controversy prior to the US mid-term elections on November 3.

How could higher petrol and diesel costs hit American households?

As far as Americans are concerned, the immediate consequence will be to pay more at the gas station. The families who rely on their vehicles for their daily commute, school pickup, and other errands have few ways of circumventing the cost of higher gasoline.

The residents of the suburbs and rural areas, where there is poor public transport infrastructure, are likely to experience it acutely.

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The AFP news outlet reported that the average price of gasoline in the US amounted to $4.33 per gallon, up by more than 45% since the beginning of the crisis. In September alone, the price of gasoline increased by 9.1%.

There are repercussions beyond the cost being felt by private motorists. The price of diesel has risen by 67.7% as per the data provided by AFP.

These rising costs may find themselves reflected in the supply chain. Transportation firms may pay for some of the extra costs incurred, but others may end up raising their delivery costs or passing the cost to retailers.

In case of continued high costs of diesel fuel, there is bound to be increased costs of foodstuffs and household goods that are carried over distances in transport.

The impact will differ from one consumer group and business sector. Energy-sensitive sectors of business have greater exposure to the fluctuation of energy prices, while how much of the cost finds its way into the consumer depends on various factors.

Why airline fares and everyday expenses could rise

Prices of fuel can also have an impact on the price of air travel. Airlines consume a large amount of fuel, and thus any continuous rise in fuel prices can force airlines to increase the price of tickets, even though fare prices are also dependent on the demand for flights.

James Knightley, an ING economist, told AFP that the Iran-US standoff had a part to play in the rise in motor fuel prices and increase in airline fares. This means that travellers will now incur higher costs during travel as people attempt to cope with higher costs in other areas of life.

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The cost of transport is not restricted to just airlines and road freight, as there are businesses that may incur higher costs due to transport costs. The extent to which the cost will be passed to consumers will depend on the strategies that the firms employ.

The inflation report released in September brought some comfort in terms of food prices. Based on data from the US Bureau of Labor Statistics, the index remained steady overall, whereas the prices of food at home were down by 0.1%. On the other hand, the prices of food consumed in restaurants were up by 0.2%.

These mixed results mean that all households will not have to endure the same stress. Those who travel often and use cars can see the rise immediately, whereas others will see it indirectly.

Will higher fuel prices keep US inflation elevated?

The most recent numbers put the Fed on its toes in deciding how to balance the risks of inflation with economic growth. Higher interest rates will be useful in taming demand, but they will make mortgages and car loans costlier.

According to AFP, the Core Consumer Price Index, which measures inflation without considering the highly volatile prices of food and energy, increased 2.6% year-over-year in September.

Knightley said that the recent numbers would not prompt the Federal Reserve to raise interest rates when it meets on October 27–28.

Even as the Federal Reserve keeps interest rates on hold, there is little prospect that motorists will get any respite at the pumps, because gasoline prices will be driven by global supply, demand and politics, and it may take some time before the increased transport costs feed into the broader economy.

As a result, the length of the conflict and the disruptions to the Strait of Hormuz will continue to play a critical role in the inflation forecast. As long as fuel prices remain high, there will be pressure.

However, if the energy markets become stabilised, this pressure may decrease, while other costs may still stay high.

Ahead of the November mid-term elections, there is every chance that the cost of living will remain a very big problem for Americans. The main concern for the American household will be clear and simple – how much additional money they have to pay for their car rides to work, trips, and their daily necessities.