By Qaiser Nawab, Chairman BRISD
The US Bureau of Statistics reported that consumer prices rose 4.2 per cent in the year to May, the fastest annual pace since April 2023 and the third straight month of acceleration. Energy costs rose roughly 23 per cent over the year, with gasoline up more than 40 per cent and heating oil climbing faster still. The trigger was the war with Iran, which has disrupted supply and restored a familiar risk premium to global crude. Strip out food and energy, and the core measure rose a far gentler 2.9 per cent. There is a real difference between inflation that is broad and self-reinforcing and inflation that is narrow and imported. The first is the dangerous kind, where wages and prices chase one another and expectations come loose from their moorings. The second is painful but more contained, and it usually recedes once the shock passes. The current data leans firmly toward the second. Core commodity prices actually fell, used-car prices declined, and several leading economists have suggested May may mark the peak, with gasoline already easing in early June.
Yet because the dollar sits at the centre of the global financial system, even an imported, possibly temporary American shock carries outsized weight elsewhere. US markets set pricing benchmarks for countless assets, and Federal Reserve decisions ripple through capital flows from Europe to Asia to Latin America. A hotter inflation print complicates the expected path for US rates. Only months ago, the debate was about when the Fed would begin cutting; now some analysts openly wonder whether its next move could be a hike. Higher-for-longer rates tend to strengthen the dollar, and a stronger dollar tightens liquidity worldwide, raising the cost of dollar-denominated debt for governments and companies far from American shores.
This is where the asymmetry of the global economy reveals itself. Advanced economies with deep markets and reserve-currency privilege can absorb a temporary surge with relative ease. Emerging markets operate on narrower margins, where currency depreciation can quickly transmit imported inflation into domestic prices and erode living standards. Pakistan, with its IMF discipline and heavy external borrowing, understands this exposure intimately. A hawkish Fed tightens conditions well beyond Washington, and the squeeze lands hardest on economies with thin reserves and large import bills.
The deeper lesson of the May data is one about the limits of central banking itself. The Fed’s instruments are designed to cool domestic demand. They can do almost nothing about a supply disruption originating in the Persian Gulf. Raising rates to fight an oil-driven price shock risks choking economic activity without touching the actual cause, a mistake monetary authorities have made before. Yet inaction risks letting temporarily high inflation seep into expectations and harden into something permanent. The committee meeting later this month will be watched closely precisely because there are no painless choices available.
A newer pressure deserves mention, too. Analysts increasingly point to the enormous electricity demand of the data centres built to power artificial intelligence as a genuine upward force on energy prices. It is a striking reminder that the technologies we sell as the future carry physical costs in the present, and that those costs are beginning to surface in the price index.None of this warrants alarm. This is not the runaway inflation of 2021 and 2022. It is a supply-driven reminder of vulnerabilities that cross national borders, and the most likely path is for headline inflation to ease as energy markets settle, while core pressures subside more gradually.
About the Author:
Qaiser Nawab is Chairman of the Belt and Road Initiative for Sustainable Development (BRISD), an international platform fostering cooperation and innovation across Asia, Africa, and Latin America. He can be reached at qaisernawab098@gmail.com
