Why gas prices could push up your interest rates

The pump is back in the inflation story

On October 14, the U.S. Bureau of Labor Statistics (BLS) reported that consumer prices rose 3.7% in the 12 months to September, up from 3.4% in August. Over the month alone, prices rose 0.6%, and the BLS said the gasoline index, which jumped 9.1% in September, accounted for more than half of that monthly increase.1

Over a full year, the BLS figures show gasoline up 34.2% and energy overall up 20.4%. Fuel also feeds into other prices: airline fares, for example, were up 22.4% from a year earlier.1

Why "core" matters

Economists also watch core inflation, which strips out food and energy because those prices swing so much. Core inflation was 2.6% over the year to September, up from 2.4% in August, according to the BLS. Reuters reported that this was higher than the 2.5% economists it polled had expected, and quoted analysts who saw signs that price rises were spreading beyond energy.4

Oil and the Middle East

Behind the pump price is crude oil. On October 16, the global benchmark, Brent, hit $110 a barrel for the first time since May, Bloomberg reported.5 Over the following days, Iran-backed Houthi militants in Yemen claimed attacks on Saudi Arabia, including on Saudi Aramco facilities in Yanbu and the Shaybah oilfield. CNBC, which reported the claims, said it could not verify them.6 Reuters, via CNBC, reported that Brent touched a five-month high of $111.99 on October 20, amid attacks on tankers in the Gulf linked to the war with Iran, the conflict that began when the U.S. and Israel launched wide-ranging strikes on Iran on February 28, according to the BBC.7,3

The Fed has already moved once

On September 16, the Federal Reserve's rate-setting committee voted 12–0 to raise the target range for the federal funds rate by a quarter of a percentage point, to 3.75%–4%. "Inflation remains elevated," the statement said. Reuters described it as the first rate hike under the new Fed chair, Kevin Warsh.8,9 According to the minutes of that meeting, a couple of officials said higher rates would help keep price increases "stemming from energy market disruptions" from "broadening out."10

The dollar comes loose from gold

To see why oil and interest rates became so tightly linked, start in 1971. Since the end of World War II, the U.S. dollar had been tied to gold under the Bretton Woods system, and other currencies were tied to the dollar. On the evening of August 15, 1971, President Richard Nixon announced that the United States would end the convertibility of dollars into gold, along with wage and price controls, according to the Federal Reserve's own history site.14

Nothing about that announcement made gas more expensive the next morning. But it removed an old anchor for the value of money. From then on, keeping inflation in check would depend much more on the decisions of the central bank.

Today’s echoIt's the Fed, not a link to gold, that has to decide how to answer 3.7% inflation at its Oct. 27–28 meeting.1,11

The first oil shock

Two years later, the anchor was tested. In October 1973, during the Yom Kippur War, the Organization of Arab Petroleum Exporting Countries placed an oil embargo on the United States and began cutting production. Those cuts nearly quadrupled the price of oil, from $2.90 a barrel before the embargo to $11.65 in January 1974, according to Federal Reserve History.15

Stagflation

The 1970s gave Americans a new word: stagflation, a painful mix of high inflation and a weak economy with high unemployment. It was a problem the standard playbook struggled with. Fighting inflation could push unemployment higher, while fighting unemployment could push inflation higher.

Today’s echoBrent crude topped $110 a barrel after Houthi claims of attacks on Saudi oil sites, and gasoline drove more than half of September's rise in prices.5,6,1

Congress writes the Fed's job description

In 1977, Congress amended the Federal Reserve Act. The Federal Reserve Reform Act directed the Fed to "promote the goals of maximum employment, stable prices, and moderate long-term interest rates," as Federal Reserve History quotes it.16 The first two goals became known as the Fed's dual mandate: keep people working, and keep prices stable. That pairing explains why every rate decision is a balancing act. Raising rates can help with prices but risks jobs.

Today’s echoThe Fed's Sept. 16 statement noted that the unemployment rate "has changed little" while "inflation remains elevated," and called its rate hike "in support of the Federal Reserve's dual mandate."8

The second oil shock, and the Volcker cure

Then came a second shock. After the 1979 revolution in Iran, Iranian oil output fell by 4.8 million barrels a day, about 7% of world production at the time, and oil prices more than doubled between April 1979 and April 1980, according to Federal Reserve History.17

In August 1979, Paul Volcker became chair of the Fed. His answer to entrenched inflation was blunt. In late 1980 and early 1981, the Fed tightened so hard that the federal funds rate, the rate banks charge each other for overnight loans, approached 20%.17 (That is not the same as the prime rate that banks charge their customers, which is set higher.)

The price of the cure

The cure hurt. The U.S. fell into a deep recession, and unemployment peaked near 11% at the end of 1982. But by October 1982, inflation had fallen to 5%, according to Federal Reserve History. The episode set a template that still shapes the Fed: it showed that a central bank willing to raise rates sharply could break high inflation, at a real cost to jobs.

Today’s echoIn September the Fed raised its rate to 3.75%–4%, the first hike under Chair Kevin Warsh, saying "inflation remains elevated."8,9

Putting a number on "stable prices"

For decades, "stable prices" had no official number. That changed on January 25, 2012, when the Fed's rate-setting committee said that inflation of 2%, measured by the annual change in the price index for personal consumption expenditures (PCE), was most consistent with its mandate.18 The 2% target is why a 3.7% reading today is treated as a problem, not a curiosity.

You can see this todaywhen Warsh calls the Fed's 2% goal "a firm, fixed target" while inflation runs at 3.7%.11,1

The post-pandemic surge

The most recent test came after the pandemic. Over the 12 months ending in June 2022, consumer prices rose 9.1%, the biggest 12-month increase since November 1981, the BLS reported.19 Energy prices were up 41.6% over that year, and gasoline alone was up 59.9%.

The Fed had begun raising rates in March 2022, lifting the federal funds target range to 0.25%–0.5% and signaling more increases to come.21 It did follow with more. At its peak, reached in July 2023, the federal funds target range stood at 5.25%–5.5%, according to the Fed's July 26, 2023 statement.22 For many households, that was the first time in years that rising rates showed up in their monthly bills.

Today’s echoBorrowing costs follow rates up: the 10-year Treasury yield, the main benchmark for mortgages, was about 5.1% on Oct. 21.12

How a rate hike reaches your bills

Here is the chain in plain terms. When the Fed raises the federal funds rate, banks pay more to borrow, and they pass that on.

Credit cards

Most credit cards have variable rates tied to the prime rate, which banks set based on the federal funds rate. In the Fed's daily data, the bank prime loan rate stood at 7%, three points above the top of the Fed's 3.75%–4% range.13 So when the Fed raises its rate, card rates usually rise soon after, and any balance you carry costs more.

Mortgages

Fixed mortgage rates don't follow the Fed directly. They track longer-term borrowing costs, especially the 10-year Treasury yield, which CNBC calls "the main benchmark for mortgages, auto loans and credit card debt."12 The Fed's daily data put the 10-year yield at 5.21% on October 13 and 5.15% on October 19, and CNBC reported it at about 5.1% on October 21.13,12 A fixed-rate mortgage you already have won't change. New mortgages, adjustable-rate loans and home-equity lines are the ones that feel it.

Savings

There is a flip side: when rates rise, savers tend to earn more on savings accounts and Treasury bills.

What to watch

The Fed's October 27–28 meeting. Markets see another hike as possible, not likely. Reuters reported that right after the September inflation data, futures were priced for around even odds of an October hike.4 By October 16, CNBC reported, futures put the probability at about 15%, after Fed Vice Chair Philip Jefferson and New York Fed President John Williams signaled little urgency to raise rates.11 Warsh himself said he wasn't signaling a decision either way. In September, the median Fed official projected one more hike in 2026, which, CNBC noted, left room to pause in October and move later.

Oil and the Middle East. Any further attacks on Saudi oil sites or Gulf shipping could push crude, and then pump prices, higher. Rootread will have more on the roots of the conflict in Yemen.

The next inflation report. The BLS is scheduled to publish October's consumer price figures on November 10.1

The calendar. The Fed's decision comes about a week before the November 3 midterm elections, so inflation and interest rates will be fresh news when voters head to the polls.

The deeper pattern is the one this story began with. Since 1971, the big energy shocks have repeatedly tested the Fed. In the 1970s, by the Fed's own historical account, inflation got away from it for years; in the early 1980s it broke inflation at a high price; in 2022 it raised rates fast. Whether 2026 calls for more of the same is the question the Fed meets next week to answer.