Hormuz attacks hit a record, US wholesale prices surge, and India quietly tightens its rupee defence

A supply shock is a sudden fall in how much of a good can reach buyers, and the Hormuz situation is close to a textbook case. The strait has not been physically blocked, but the threat of being struck is enough to change behaviour. Shipping companies raise their prices to cover higher insurance costs. Some reroute around the Cape of Good Hope, adding two to three weeks to a voyage. Others simply wait. Each of those responses reduces the effective supply of oil reaching the market, and when supply falls while demand stays the same, the price rises.

The precedent that fits best is the Red Sea disruption of 2024 and 2025, when Houthi attacks pushed container freight rates sharply higher and rerouted a significant share of global trade. That episode showed that the price effect arrives quickly, within days of attacks intensifying, while the physical rerouting takes longer. The difference here is that Hormuz carries oil rather than container goods, so the transmission to petrol prices and energy costs is more direct. Twelve ships struck in a week is a number that, if sustained, would be hard for markets to treat as noise. Whether it stays at that level or escalates further is the question that will determine whether this remains a risk premium story or becomes a genuine supply disruption.

For an IB Economics student, this is a clean example of how a negative supply shock shifts the supply curve to the left in the oil market, raising the equilibrium price. The harder question for evaluation is whether the demand side adjusts: if a global slowdown is already under way, weaker demand could partly offset the supply squeeze, limiting the price rise. One month of elevated attack data is not proof of a permanent shift, but twelve vessels in a week is not easy to dismiss.

Fed Chair Warsh's refusal to signal a rate cut is the actor's dilemma made visible. He is weighing two risks at once. Cut too soon and the 6.3% producer price reading feeds through to consumers, entrenching an inflationary mindset, the tendency of households and firms to expect high inflation and then build it into wages and prices, making it self-fulfilling. Hold too long and the higher borrowing costs slow investment and growth more than necessary. The fact that the PPI reading beat forecasts by 0.8 percentage points matters because markets had already priced in a relatively benign path for inflation.

Warsh also flagged AI as a short-term inflation risk, which is an unusual argument worth taking seriously. Large AI investment programmes require enormous amounts of energy, data-centre construction, and specialist hardware. All of that spending raises demand for inputs before any productivity gains show up in output. So in the near term, AI investment could act like any other demand surge: more money chasing the same supply of goods, pushing prices up. The productivity payoff, if it arrives, comes later. That gap between the cost now and the benefit later is exactly the kind of uncertainty that makes a central bank cautious about cutting rates. One month of data is not proof of a trend, but a 6.3% reading after months of forecasters calling the peak is a reason to take the caution seriously.

The RBI's dilemma is a classic example of what economists call the impossible trinity: a central bank cannot simultaneously keep its exchange rate stable, allow free movement of capital across borders, and set interest rates to suit its own domestic economy. It can only pick two. India has relatively open capital flows, so when the RBI wants to stabilise the rupee, it has to use either its foreign currency reserves to buy rupees directly, or raise interest rates to attract capital inflows. Both tools have costs. Spending reserves depletes a buffer that matters in a crisis. Raising rates slows domestic borrowing and investment.

What is interesting about today's move is the sequencing. The RBI has been using direct intervention for weeks, and it is now adding the rate tool on top, carefully. That suggests reserves alone are not doing enough, or that the RBI judges the rupee's weakness to be partly driven by interest-rate differentials rather than pure speculation. If US rates stay high because of the 6.3% PPI reading in Story 2, the gap between US and Indian rates narrows, making rupee assets less attractive to foreign investors. The RBI is essentially trying to widen that gap back out without committing to a rate path that would damage the growth story. Whether it can thread that needle depends on how long US rates stay elevated.