Oil prices are starting to fall again, so surely that must mean our cost-of-living problems should be disappearing too, right? Well, if only the economics behind that were so straightforward and cooperative.
WTI crude has dropped back to just below $86 today amid hopes of easing geopolitical tensions in the Middle East. That is welcome news for households especially after the energy shock this year and I can understand why markets are getting excited as well.
But before popping the champagne, this is something worth remembering. Cheaper oil doesn't necessarily mean cheaper living.
Sure, lower oil prices should eventually bring some relief to let's say the gasoline pump. That means transportation and shipping costs could also ease, affording businesses a little bit more breathing room.
But here's something to think about. When was the last time that your rent, insurance bill or favourite restaurant actually became cheaper? Dum, dum, dum. Exactly. And this is precisely where the inflation story gets a little more complicated beyond just falling oil prices.
Just take a look at the chart above. Since January 2020, gasoline prices have jumped by nearly 68% while food and shelter costs have risen by around 35% and 34% respectively in the US. Meanwhile, overall consumer prices have increased by roughly 31%.
Now, here's the interesting bit. Nominal wages have also risen by nearly 34% during the same period, slightly outpacing overall inflation. On paper, that suggests the average worker should be a little better off, no? Well, not quite.
The fact of the matter is that we don't all spend our money the same way. If you're spending a bigger chunk of your income on things like groceries, rent and gasoline, then those price increases can still sting. And a cheaper tank of gasoline today isn't going to magically reverse years of higher living costs.
Anyway, let's put aside the numbers and focus on what's really important here. At the end of the day, inflation coming down doesn't mean prices are coming down. It simply means that prices are still rising, just more slowly.
So even if gasoline prices are to fall today, that doesn't undo years of increases in housing, food, healthcare and other essential expenses. And then there's another twist to all of this too. Cheaper fuel leaves consumers with more money to spend elsewhere, potentially supporting demand and keeping some price pressures alive.
So, what does all this mean for the Fed?
I think it's relatively straightforward. Falling oil prices can help to ease the pressure showing up on headline inflation. However, policymakers need to see broader improvements in underlying price pressures before they can feel comfortable changing course.
With that in mind, I would argue that markets ought to pay more attention to things like core services inflation, wage growth, and Treasury yields as compared to watching out for the next $5 or $10 drop in oil prices.
If the next inflation reports show genuine signs of cooling beyond energy, only then markets might have reason to rethink the Fed's policy outlook. But if services inflation stays stubborn, then cheaper oil on its own probably won't be able to move the needle much.
That's sort of the irony of it all now, isn't it? Oil prices might be falling again but the inflation problem isn't necessarily going to follow in that same direction.
This article was written by Justin Low at investinglive.com.from Investinglive RSS Breaking education Feed https://ift.tt/tm89rJv
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