Inflation pressures persist as weather, AI, tariffs and wars raise costs

Inflation risks are building from several directions even after oil prices eased from recent highs tied to the U.S.-Iran conflict, Fortune reported. The mix matters for households, companies and investors because Federal Reserve officials have spent five years contending with inflation above their 2% target, according to Fortune.

Markets are already pricing in more central-bank tightening, Fortune reported, citing CME FedWatch data. Investors see an 85% chance that the Fed raises rates at least once by year-end, with the probability of two or more increases near 50%, according to CME data cited by Fortune.

Weather threatens food costs

A strong El Niño pattern forming this summer could disrupt commodity markets, Fortune reported. Some scientists have described the developing pattern as a “super” or “Godzilla” El Niño, according to Fortune.

El Niño has typically brought wetter conditions to southern South America, the southern United States, Central Asia and East Africa, while leaving Australia, northern South America, West Africa, the northern United States and Canada, and parts of South, Southeast and East Asia drier, Fortune reported.

The effect on crops is uneven because some regions may get better growing conditions while others face damage, Fortune reported. Capital Economics warned that soft commodities — including perishable crops — are especially exposed, and said coffee and cocoa posted the largest agricultural price increases during the 2023-24 El Niño.

AI demand strains supplies

The artificial intelligence buildout is adding another source of price pressure, Fortune reported. Large cloud and technology companies are spending hundreds of billions of dollars a year to add AI capacity, creating demand that has outpaced supply in some areas, according to Fortune.

Memory chips are one example, Fortune reported. Demand from data centers has tightened availability for other products, including consumer electronics, and Apple recently announced sharp device price increases while reportedly seeking chips from a blacklisted Chinese producer to ease shortages, according to Fortune.

Federal Reserve officials have also discussed AI-linked inflation risks, Fortune reported, citing minutes from the central bank’s latest meeting. New York Fed President John Williams said this past week that a lasting boost to demand relative to supply could require a rate response, according to Fortune.

Tariffs are still feeding through

President Donald Trump’s tariffs raised prices by less than many had feared last year because some companies absorbed part of the cost, Fortune reported. New York Fed survey results suggest many firms still expect to pass more of those costs to customers.

Among businesses that directly paid tariffs, 47% of service firms and 44% of manufacturers said they had more tariff-related price increases still to impose, according to the New York Fed survey cited by Fortune. Fortune reported that the Supreme Court struck down Trump’s global levies, while other duties, including steel tariffs, stayed in place and the administration planned additional tariffs under Section 301 of the Trade Act of 1974.

New York Fed researchers said businesses appear to be adjusting prices gradually more than a year after tariffs began, according to Fortune. The researchers said it was unclear whether companies were reacting to one tariff round or a series of increases, but said tariff costs tend to reach consumer prices over much of a year rather than all at once.

Wars hit fuel and grain markets

The U.S.-Israeli war on Iran disrupted crude supplies and also affected refined fuels such as gasoline and diesel, Fortune reported. Crude prices have fallen from wartime peaks, but refined-product prices have been slower to decline because U.S. demand remains high and China only recently eased limits on fuel exports, according to Fortune.

Ukraine’s drone strikes on Russian oil infrastructure have damaged refining capacity and pushed Moscow to cut fuel exports to meet domestic needs, Fortune reported. Diesel futures rose 11% on Wednesday after Russia said it would ban exports of the fuel, and Russian drivers have faced lines of up to 18 hours at gas stations, according to Fortune.

Fortune reported that attacks tied to the Russia-Ukraine war have also affected grain exports and a key Black Sea shipping route. Wheat prices climbed as much as 4.8% on Friday, while a European benchmark rose as much as 5.7%, according to Fortune.

This story draws on original reporting from Fortune.