When gauging the U.S. economy, diesel prices are watched as closely as gasoline. As the main fuel for freight trucks, rising diesel prices push up the cost of goods delivered across the country. As of May 30 local time, the U.S. national average for diesel stood at $5.49 per gallon, approaching the all-time high of $5.82 set in June 2022.
U.S. inflation is also stirring. The core personal consumption expenditures (PCE) index, the Federal Reserve's preferred gauge for setting interest rates, rose 3.3% year-on-year in April, while the headline PCE index climbed 3.8%, both well above the Fed's 2% policy target. Despite President Donald Trump's pressure for rate cuts, market-implied odds of a rate hike this year have risen to about 50%, on par with the odds of a hold.
Over the past two years, benchmark interest rates in the U.S. and around the world have pointed downward. After inflation surged in the wake of COVID-19, countries embarked on aggressive rate hikes, then cut rates in 2024 and last year as price pressures showed signs of easing. According to Reuters, the central banks of 10 major economies cut their benchmark rates by a combined 850 basis points (1 bp = 0.01 percentage point) in 2024 and 800 bp last year.
But with the fallout from war-driven high oil prices beginning to take hold, central banks are now preparing to raise rates. European Central Bank (ECB) President Christine Lagarde, at a press conference following the April monetary policy meeting, signaled a June rate hike, saying the bank had "discussed the possibility of a rate increase in depth and at length." Eurozone inflation, which stood at 1.9% in February before the war broke out, jumped to 3% in April. The dominant view is that the Bank of Japan (BOJ) will also raise its benchmark rate from 0.75% to 1.0% in June. Many central banks have already moved. The Reserve Bank of Australia (RBA) raised rates three times in a row, in February, March and May. Indonesia also delivered a surprise 0.5 percentage point hike after its currency fell to a record low. Bank of Korea Governor Hyun Song Shin has also indicated a rate hike this year is a given.
The problem is that oil prices, the source of inflation, are unlikely to stabilize anytime soon. Mike Wirth, CEO of U.S. oil major Chevron, told a conference on May 28 that "upward pressure on oil prices will intensify as we move into June, and especially July." Neil Chapman, senior vice president of ExxonMobil, also warned of an oil price surge on May 29, saying "global crude inventories could fall to extremely low levels within the next two to three weeks." Even if the U.S. and Iran sign a memorandum of understanding (MOU) for a 60-day ceasefire, many observers expect oil prices to stay elevated for the time being, given that a final deal on the Strait of Hormuz and Iran's nuclear program is unlikely to be easily reached.
When central banks around the world simultaneously start tightening the money supply, markets are bound to feel the strain. If liquidity dries up, the data center construction boom led by Big Tech, which is currently driving the semiconductor super cycle, could also lose steam, weighing on chip stocks.
The impact is most likely to hit Korea, the world's best-performing equity market this year. Among major global stock indexes, the KOSPI has posted the biggest year-to-date gain at 101.1%, followed by Taiwan at 50.7%, Japan's Nikkei 225 at 31.8% and the Nasdaq at 16.1%. Bloomberg noted that "with the first half of the year not yet over, the KOSPI is rivaling the Nasdaq's 102% surge in 1999, just before the dot-com bubble burst." The pace of Korea's stock rally has been so steep that retail investors are taking on huge debts to invest, creating a precarious situation.
At a time like this, the government should not be elated by surging stock prices but should prepare contingency plans for a possible market crash. Yet the only message coming through is the remark from an economic policymaker that "the three highs of high interest rates, high inflation and high exchange rates are the cost of success" — a cause for concern.
