Tags: oil | inflation

Low Oil Prices Keeping a Lid on Inflation

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Friday, 15 May 2009 01:45 PM Current | Bio | Archive

The just-released April Consumer Price Index is flat following a 0.1 percent decline in March. Compared to the same period last year, consumer prices were down 0.7 percent (seasonally adjusted) in April. In March, the year-over-year CPI fell 0.4 percent.

Core prices though unexpectedly jumped 0.3 percent compared to a 0.2 percent increase in March. Core prices rose 1.9 percent year-over-year after a 1.8 percent in March.

The Labor Department informs that over 40 percent of the gain in the core rate was due to a second consecutive hike in tobacco taxes.

Apparently, states are trying to make up lost revenues with these taxes.

The 2.4 percent drop in energy costs was led by a 2.8 percent fall in gasoline prices in April. While prices have been rising at the pump, the increases have been less than expected due to seasonal factors. Heating oil dipped 2.1 percent while piped gas and electricity declined 2.2 percent.

In addition, food prices decreased 0.2 percent in the latest month.

On a year-over-year basis, overall CPI inflation is at its weakest since 1955.

That said, these numbers tell us that, if energy picks up strength, overall inflation is at risk of picking of steam. Question is, of course, could that happen?

Most projections for U.S. headline CPI assume roughly flat oil prices through 2009, consistent with current oil futures. Under this scenario oil prices will remain flat, headline inflation is forecast to closely track core inflation that excludes all food and energy prices, through the rest of the year.

Sequentially, prices are expected to move up 1.2 percent quarter-over-quarter in the second quarter and then gradually decelerate through the fourth quarter to around a 0.5 percent pace, reflecting the disinflationary impulse of rising economic slack.

Nobody doubt higher oil prices remain a key risk to the inflation outlook (expectations!). If oil prices were to steadily rise through the summer to $70 per barrel by September, inflation could go up by about 1.5 percent.

That would certainly put a fairly large stress on the already fragile U.S. consumer.

Alternatively, a surge in oil prices to $90 a barrel by September would take third-quarter inflation to around 4.5 percent.

This would be a huge hit to consumer purchasing power and would likely bury all early recovery hopes.

We should keep in mind that oil prices always have had, under normal circumstances, a very strong seasonal pattern. WTI prices typically decline in the fourth quarter following the end of the U.S. hurricane season in November.

One month forward, contract prices typically bottom in December and January. Prices then rise again through the first half of the year and normally peak in the third quarter.

After plunging during the second half of 2008, oil prices have now come back from under $40 per barrel to $55 to $60.

If the recent rise of oil prices goes on through the 2009 hurricane season (June – November), that could trip up economic recovery before it even gets out of the starting blocks.

At this moment, the futures markets do not indicate much of a further increase in oil prices. Still, investors should keep a close eye on it.

In the mean time, the good news is that the International Energy Agency yesterday said global demand for oil would record its sharpest annual drop since 1981. That should not be bullish for the price of oil assuming producers don’t cut their production.

Also, bearish for the oil price was yesterday’s IEA statement: "As far as oil is concerned, the latest available data indicate that the 'demand green shoots', if any, continue to be buried under the thick ice of the current economic winter."

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HansParisis
The just-released April Consumer Price Index is flat following a 0.1 percent decline in March. Compared to the same period last year, consumer prices were down 0.7 percent (seasonally adjusted) in April. In March, the year-over-year CPI fell 0.4 percent. Core prices though...
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2009-45-15
Friday, 15 May 2009 01:45 PM
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