Interest rate hike likely as oil and inflation ding stocks

Oil prices spiked to more than $100 per barrel this week, and with inflation remaining high investors are betting the Federal Reserve hikes interest rates next week.MANHATTAN (CN) — As conflict with Iran has heated up, so has inflation and oil prices, causing equities to start cooling again.Oil prices nearly saw a double-digit percentage increase this week, driven by slowing shipping traffic in the Strait of Hormuz, and by Friday afternoon barrels of Brent crude were trading north of $104.Wall Street did not ignore the spike in energy prices, and by the closing bell on Friday the Dow Jones Industrial Average lost 848 points for the week, while the S&P 500 dropped 62 points and the Nasdaq fell 173 points.Increasing energy prices have already taken a toll on supply chains and inflation, which was borne out by key economic reports this week. On Friday, the consumer price index increased 0.4% last month, in line with what economists forecast, while annualized inflation increased by 3.4%.A number of sectors, driven by the resurgence in energy prices, saw notable increases. Airline fares rose by 2.7% since July and nearly 24% from a year ago, while restaurant spending has increased 3.4% since this time last year.A day earlier the producer price index similarly met expectations, rising 0.4% for August, with the index increasing 5.4% over the last year. The main driver of the inflation increase was energy prices, which rose 4.2% last month, the largest gain since May.Experts say energy prices are almost guaranteed to rise again in September’s CPI and PPI reports, and other sectors such as transportation, warehousing and food are feeling the effects.“Diesel is also particularly important for food inflation, as most farming equipment and transportation moving goods to grocery stores rely on diesel as their source of fuel,” Grace Zwemmer, economist at Oxford Economist, wrote in an investor’s note. “Diesel prices can affect food prices with up to a nine-month lag based on the timing of the planning versus harvest season.”With inflation still too hot, many analysts say the Federal Reserve could raise interest rates next week, with some experts saying the central bank could hike rates by as much as 75 basis points.Earlier this week the European Central Bank raised its own interest rates, the second time this year it has done so. The Federal Reserve is scheduled to meet next week.Meanwhile, optimism has started to decline again, with the University of Michigan’s preliminary reading for September dropping a few points, with sentiment falling particularly among low- and middle-income households.In its own optimism index, the National Federation of Independent Business showed a slight dip among small businesses last month, though the index still hovers around its high point.Inflation remains the largest reported problem, but other issues also plague small businesses, including 62% of respondents saying supply chain disruptions impacted their business and actual sales worsening in August.“Uncertainty remains elevated among small business owners as they face a mixed set of challenges with weakened sales, supply chain disruptions, and inflation pressures,” NFIB Chief Economist Bill Dunkelberg said in a statement. “While expectations for the overall economy dimmed, Main Street owners remain largely positive in the health of their own businesses.”Subscribe to our free newslettersOur weekly newsletter Closing Arguments offers the latest about ongoing trials, major litigation and rulings in courthouses around the U.S. and the world, while the monthly Under the Lights dishes the legal dirt from Hollywood, sports, Big Tech and the arts.Additional Reads