Rising oil prices could make the Fed's inflation-fighting job tougher

Currently, inflation is very low, and wage inflation is nonexistent, due to slack labor markets, the Fed said in the minutes of its most recent meeting in September. Hence, don't look for wage pressure to move the inflation needle anytime soon.

However, oil could present a problem. Due to its importance in the U.S. economy, higher oil costs could force businesses to raise prices to avoid having their margins squeezed, leading to an uptick in inflation. And, this form of inflation is largely beyond the Fed's control. To be sure, amid competitive pressures, some companies would no-doubt eat the added cost rather than risk losing business, but companies can absorb higher costs only up to a point. Eventually, prices would have to rise to protect profits.

Oil closed Wednesday up $1.03 to $75.31 per barrel on continued optimism that both the U.S. and global economic recoveries are gaining steam, which would increase demand for crude.

Economic Analysis: The above again highlights both the need for increased energy conservation and a balanced federal budget in the U.S. Each would take pressure off oil prices: the former, by reducing oil consumption; the latter, by strengthening the dollar.