Rising oil prices = inflation heating up? Jefferies: It's just a temporary "illusion," and the Federal Reserve may cut interest rates as early as April!

JPMorgan Chief U.S. Economist Thomas Simons said that once the temporary oil price shocks subside, the trend of cooling U.S. inflation will continue.

He believes that although energy costs may cause overall inflation to spike, the overall cooling trend remains intact because consumers have limited purchasing power—making energy-driven inflation essentially a “zero-sum game.”

“Ultimately, this is basically a zero-sum game,” he said in a recent interview.

Simons further explained that when consumers pay more for gasoline and energy, they have less money available for other expenses, which prevents widespread price increases in the economy. This dynamic helps explain why, even if overall inflation data rises, core inflation indicators may remain relatively stable.

He also discussed the growing divergence between the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE), the Federal Reserve’s preferred inflation measure.

Simons pointed out that companies facing profit pressures from tariffs and wage costs often pass these cost increases onto “high-margin goods or services, which are usually sold to less price-sensitive consumers”—that is, high-income groups—while keeping prices for basic goods purchased by low-income consumers stable.

The economist emphasized that, compared to global central banks like the European Central Bank and the Bank of England, the Federal Reserve has unique flexibility. The former focus solely on price stability. The Fed has a dual mandate to support both price stability and employment. Given the U.S. dependence on gasoline for commuting and freight transport, the Fed will consider that “if energy prices remain high, economic growth will face significant risks.”

Therefore, Simons disagrees with the current market expectation of a first rate cut in September. He believes the Fed may act sooner, with rate cuts “possibly as early as April, but definitely by June.” He also anticipates multiple rate cuts throughout the year, with a “greater likelihood of three cuts than just one.”

Simons’ broader conclusion from his analysis is that as long as energy price pressures do not impact core inflation indicators, the Fed can “ignore” fluctuations in overall inflation.

“Although short-term volatility in the oil market will occur, the underlying trend of inflation cooling in the economy seems likely to continue,” he emphasized.

This article is reprinted from Cailian Press, with Zhitong Finance Editor: Chen Wenfang.