Oil and Inflation | Jimmy McGiver

Oil and Inflation | Jimmy McGiver
Oil and Inflation | Jimmy McGiver

Jimmy McGiver*
At the start of the new year, the global benchmark price of oil fell below its level a year ago for the first time in nearly two years, an important sign that increases scrutiny of the Federal Reserve’s continued hawkish stance on inflation. The annual decline in Brent crude to the range of $80 per barrel comes in the wake of similar price shifts recently, in energy and commodities, such as natural gas, copper and wheat, after reaching a peak of 14 years, at $130 last March, and it was higher than 100. dollars per barrel in July. Against the backdrop of slowing economic activity and demand, the underlying effects strongly suggest that broader inflation has peaked and is on track to decline rapidly in the coming months.
However, the Fed is showing few signs of unwinding. At a time when policymakers are more interested in what they see as steady inflation in services and a tight labor market than they are in the rising risks of a recession.
It may be difficult to carry on much longer if deflation persists in key areas such as energy and commodities, and broader consumer price inflation eases toward the Fed’s 2% target.
Gregory Daco, chief economist at EY-Parthenon, believes that these anti-inflationary dynamics will increase, to the point that US consumer inflation could fall below 2% by the end of the year.
“The hawkish tone of policymakers will continue, but it will become difficult to elicit a narrative,” Daco said. It’s a reflection of the fact that the Fed’s anti-inflationary tools are very blunt,” he said, referring to the high federal funds rate.
The minutes of the Federal Reserve’s monetary policy meeting last December, which were published early in the new year, showed that policymakers wanted “flexibility and discretion” in future tightening moves. However, they stressed on the other hand that this does not mean that the size of their commitment to combating inflation is shrinking, and the minutes have already shown that there is not a single politician who expects to cut interest rates this year. However, a lot could change in the coming months.
It is worth noting that in December 2021, the projections of the mid-point chart, or what is known as the “dot plot”, indicated a federal funds rate of 0.9% at the end of 2022, and 1.6% at the end of 2023. The “dot plot” is known It is a key short-term interest rate that can affect savings returns and consumer loan rates.
In the same context, the war in Ukraine and global supply bottlenecks confirmed the saying that inflation was far from fleeting, and US interest rates ended last year, at a rate of more than 4%. According to many policy makers and current market indicators, prices are expected to reach at least 5% this year.
The annual rate of consumer price inflation in the United States fell for the sixth month in a row, to 6.5% last December, from a 40-year peak of 9.1% in June, and most economists expect a further decline with the help of oil price dynamics that will determine the speed and size of this. Landing.
Here, Dacko of EY-Parthenon estimates that every $10 move in oil is equivalent to about 0.2 percentage point of annual inflation. This trend is likely to continue due to fundamental effects in energy and other commodity prices, albeit to varying degrees.
The annual change in futures traded for US West Texas Intermediate oil has turned negative intermittently since November, and natural gas contracts have done the same, only fleetingly, but unaffected by the 14-year high through August. Copper has been negative since April.
According to the Pew Research Center, commodity and energy costs retained a significant weight in the consumer price index, as transportation commodities, excluding motor fuels, accounted for about 8% and energy 7.5% of the general average.
Danny Blanchflower, professor of economics at Dartmouth College and former expert at the Bank of England, says the most convincing argument for the underlying effect comes from the official inflation figures themselves. According to the Bureau of Labor Statistics, the average monthly non-seasonal rate of consumer price inflation in the first half of last year was 1 percent. In the following five months, that collapsed to an average of 0.1%.
If the annual rate of inflation is generally the sum of 12 monthly rates, then the historically unbridled highs in the first half of last year are about to be retracted from the upcoming accounts. “The underlying effects are now receding,” Blanchflower added. It is natural to believe that, on the basis of basic effects alone, inflation will be less than 2% by next June, ”noting that periods of high inflation are often followed by a decrease, if not an outright deflation.
* Writer for Reuters.



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