The Weekly Worldview: Oil and the Fed: A complicated dance

Research evidence excerpt

The Weekly Worldview: Oil and the Fed: A complicated dance

IdeaMExhibit 1: The SEP’s 2026 core PCE projection of 3.3% 4Q/4Q in 2026 implies a

roughly 0.21% monthly pace for the remainder of the year, compared with our

0.17% m/m forecast (consistent with 3.0% Q4/Q4). Our models suggest tariff

pass-through is largely complete, so core goods inflation should gradually

normalize, reinforcing the broader disinflation trend in 2H26.

0.50 US Core PCE m/m (%) 0.80 US PCE Inflation: Cumulative Tariff Pass-Through

0.45 0.70

0.40 0.60 Effect of tariffs on headline PCE (y/y, pp contribution)

0.35 Estimated total passthrough 0.62

0.30 0.50

0.25 0.21 0.40

0.20 0.30

0.15 Actual

0.10 MS forecasts 0.20

0.05 SEP-implied 0.10

0.00 0.00

Jan-25 Apr-25 Jul-25 Oct-25 Jan-26 Apr-26 Jul-26 Oct-26 Apr-25 Jun-25 Aug-25 Oct-25 Dec-25 Feb-26 Apr-26

Source: BEA, BLS, Federal Reserve, Haver, Morgan Stanley Research forecasts

For other central banks, the more immediate readthrough will come through the oil

channel. Across Europe and Japan, lower oil prices reduce stagflation risks but carry

divergent policy implications. In the euro area, easing energy costs are unlikely to

derail the ECB’s tightening bias, with policymakers still focused on persistent core

inflation and wage dynamics. A September hike remains firmly in play unless lower

oil prices are accompanied by broader soft inflation data and weaker activity. By

contrast, any rebound in PMIs following a reopening of the Strait would reinforce

the case for additional tightening.

In Japan, the dynamics differ. Lower oil prices ease pressure on consumption and

corporate profitability while leaving the underlying wage-price cycle intact. Energy

driven inflation was not the driver of last week’s hike by the BoJ. Following that