BlackRock warns of energy shock as May CPI is set to show acceleration in inflation

BlackRock is closely watching Wednesday's CPI as an early test of how U.S.-Iran tensions are feeding into already elevated prices in the economy.

What to know:

• BlackRock is focused on Wednesday’s May U.S. inflation report as an early test of how the U.S.-Iran conflict and related energy shock are feeding into already sticky prices.
• Economists expect the consumer price index to rise 4.2 percent year-over-year, the fastest pace since April 2023 and well above the Federal Reserve’s 2 percent target, raising the odds of further interest rate hikes.
• Higher-for-longer borrowing costs could deepen bearish pressure on cryptocurrencies, including bitcoin, while a prolonged closure of the Strait of Hormuz risks driving an even sharper energy-driven inflation spike as U.S. oil inventories near four-decade lows.

BlackRock is closely watching Wednesday’s May U.S. inflation report for the first clear signal of how the U.S.-Iran conflict is feeding into already sticky prices.

"We look to May U.S. inflation figures for a clearer read on how the Mideast conflict energy shock is impacting already sticky inflation. The full breadth of the shock has yet to show and will depend on how it evolves," BlackRock Investment Institute said in its weekly market commentary.

The U.S. consumer price index (CPI) for May is scheduled for release on Wednesday at 08:30 am ET. Economists polled by Reuters forecast that the CPI jumped 4.2% year-on-year, the sharpest increase since April 2023 and up from 3.8% in April.

The expected acceleration would mark another reminder that inflation remains stubbornly above the Federal Reserve’s 2% target, reinforcing the prospect that the Fed's next move could be an interest rate hike rather than cuts, as markets were expecting early this year.

Higher borrowing costs typically disincentivize investing in risk assets, including cryptocurrencies. In other words, the expected CPI increase could add to bearish pressure in the crypto market. Bitcoin has already taken a beating last week, falling nearly 14% to under $60,000.

A major risk factor, according to BlackRock, is the possibility of a prolonged closure of the Strait of Hormuz stretching into July. Such a disruption would push the energy shock into the forefront of inflation dynamics, especially as U.S. oil inventories could fall to their lowest levels in four decades.

"We think a prolonged closure of the Strait of Hormuz into July could bring the impact of the shock to the fore more prominently, especially as U.S. oil inventories potentially hit four-decade lows," the firm said.

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