Commerzbank economists Dr Christoph Balz and Dr Ralph Solveen link higher oil prices tied to the Iran war with higher US inflation. They forecast March CPI at 0.9% month-on-month and 3.3% year-on-year, compared with 2.4% year-on-year in February.
They state the energy price shock has been visible at US petrol stations since early March. Seasonally adjusted petrol prices are said to be up about 20% from February, making petrol the main driver.
Core CPI Outlook
For core CPI, which excludes food and energy, they expect 0.3% month-on-month and 2.7% year-on-year. They also say the CPI downtrend is likely to end.
Under a scenario where the war lasts until the end of May, they expect inflation to rise to nearly 4% in the coming months. They add that CPI can understate inflation risks.
They note that, even before the energy shock, PCE inflation was 2.8% on the headline measure and 3.1% on the core measure. The piece states that central banks are not acting strongly enough, which could keep inflation above 2% for longer.
With the March CPI statistics set to be released next week, we must position for a significant inflation surprise driven by the oil price shock. The latest EIA data confirms this pressure, showing average national gasoline prices have climbed over 18% since early March, now sitting at $3.95 per gallon. This suggests the market may be underestimating the headline inflation number.
Given the view that the Federal Reserve is not acting aggressively enough, we should anticipate interest rates staying higher for longer. We can express this by shorting December SOFR futures, which are currently pricing in at least two rate cuts by year-end. A hot inflation report would challenge that narrative and cause those contracts to reprice lower.
Curve Trade Expression
This inflation dynamic will likely push front-end yields up more than long-end yields, making a bear flattener trade attractive. We are looking at shorting 2-year Treasury note futures (ZT) while going long 10-year note futures (ZN) to profit from this potential shift. Looking back, we saw a similar pattern in early 2025 when stubborn services inflation caused a rapid steepening at the front of the curve.
To bet directly on rising inflation expectations, we can use options on inflation-linked bond ETFs like TIP. The market’s 5-year breakeven inflation rate is currently at 2.6%; if the year-on-year CPI print comes in near the forecast of 3.3%, this rate should adjust significantly higher. Buying call options on TIP is a defined-risk way to capture this potential repricing.
The core issue remains geopolitical risk in the oil market, suggesting we should maintain a long bias in energy derivatives. Call spreads on WTI crude oil futures for June delivery offer a cost-effective way to profit from further price upside. This aligns with recent IEA reports that have trimmed global supply forecasts for the second quarter, providing a fundamental reason for prices to remain firm.
Finally, a persistent inflation shock is a negative catalyst for equities, so we should consider protective positions. Buying put options on the Nasdaq 100 (NDX) for May expiration provides a hedge against a market downturn. With the VIX index currently trading at a relatively low level of 16, purchasing this type of portfolio insurance is inexpensive.
