Higher energy prices not causing inflation yet

Nick Snow
Washington Correspondent

WASHINGTON, DC, Aug. 23 -- US monetary policymakers are watching to determine if rising oil and natural gas prices are accelerating inflation. But the domestic economy has been able to absorb any impacts so far, the president of the Federal Reserve Bank of Chicago said on Aug. 22.

Economic growth is slowing down to a more normal 3%/year pace from the relatively high 3.5%/year rate of the last 3½ years, Michael H. Moskow said in remarks prepared for delivery to the McLean County Chamber of Commerce in Bloomington, Ill.

Higher energy prices, slowdowns in housing markets, and other factors could push growth lower for a short period, he said. "However, I don't see evidence of a more worrisome downshift in activity."

Energy prices nevertheless pose some economic risk, he said. "Given the large amount we spend on imported energy, increases in oil and gas prices represent a sizable transfer of income from US consumers to foreign producers, which can negatively affect economic growth."

Moskow said: "To date, the rapid increases in energy costs haven't led to much of a slowing in US economic growth. Some of the negative effect of rising oil prices has been offset by solid productivity growth and accommodative monetary policy. Plus, the US economy is less dependent on oil today."

He pointed out that in 1980, it took the energy equivalent of 2.5 bbl of oil to produce $1,000 of real gross domestic product, compared with today's 1.5 bbl of oil equivalent. Also, 11¢ of every $1 of consumer spending went to energy-related expense in the early 1980s compared to 8.5¢ in 2005.

Finally, said Moskow, the increase in crude prices, after adjusting for inflation, is less than the climb during the 1970s and crude remains below the peak reached in 1980 of $86/bbl in 2005 dollars. "Nevertheless, the cumulative effect of higher energy prices may yet have a more significant impact on economic activity going forward," he said.

Core inflation
Moskow said the core inflation rate, which excludes energy and food, has grown from the 1.5%/year that many economists consider an ideal balance to a rate at or above 2%/year for the past 27 months. Higher energy prices are one important reason, even though they are excluded from the core rate, because businesses often to pass higher energy costs through to their own product and service prices. "In fact, the magnitude of the energy and commodity price increases has been large enough to account for a goodly portion of the increase in core inflation," Moskow said.

"Looking ahead, it's likely that core inflation will come down somewhat, but risks remain," he said. "The expected deceleration in economic growth will help avoid the inflation pressures from tightening resource constraints. Moreover, the oil futures market expects that oil prices will stabilize. Should this occur, once businesses adjust their own prices to cover the higher energy costs, overall inflation should return to its earlier rate."

But Moskow also sees a risk that core inflation could run above 2%/year for some time because of further cost shocks and the disappearance of excess domestic economic capacity to help offset their effects on inflation. That could lead to higher inflation expectations, which could boost actual inflation, he warned.

"To date, inflation expectations appear to be contained," he said. "Nonetheless, we have to be vigilant in monitoring these expectations; if they did increase, it would be incumbent on the Federal Reserve to adjust policy in a way that would affirm our commitment to price stability."

He said that while the Fed's Federal Open Market Committee at its August meeting did not raise the federal funds rate target for the first time in several meetings, it could simply be using this period to evaluate the potential inflationary impacts of financial market liquidity, housing markets, economic growth, and rising energy prices before resuming interest rate target increases.

"Recent increases in core inflation have occurred at a time when energy and other commodity prices have been elevated," Moskow said. "We expect these prices to a least level off. Accordingly, the pass-through effects on inflation from these cost increases should wane somewhat. More time and data will help us quantify the contribution of these effects."

Contact Nick Snow at nsnow@cox.net.

Related Articles

TAEP: TPI still peaking, but ‘contraction unavoidable’ as oil prices fall

12/12/2014 The Texas Petro Index (TPI), a composite index based on a comprehensive group of upstream economic indicators released by the Texas Alliance of Ene...

MARKET WATCH: NYMEX crude oil price extends slump

12/12/2014 Crude oil prices extended their slump on the New York market with a Dec. 11 settlement of less than $60/bbl for January, and prices continued downw...

US needs more data before ending crude export ban, House panel told

12/11/2014 Much more environmental impact information is needed before the US can reasonably remove crude oil export limits, a witness told a House Energy and...

Rosneft, Essar sign terms of oil supply agreement

12/11/2014 OAO Rosneft and Essar Energy PLC have signed key terms of an oil supply agreement in New Delhi. Rosneft said shipments to India may begin in 2015.

Barton introduces bill to remove US crude export limits

12/11/2014

US Rep. Joe Barton (R-Tex.) introduced legislation that would remove US crude oil export limits that have been in place for nearly 40 years.

MARKET WATCH: NYMEX crude oil price slides below $61/bbl

12/11/2014 Crude oil prices fell below $61/bbl for January delivery on the New York market Dec. 10 after the Organization of Petroleum Exporting Countries low...

MARKET WATCH: US crude oil prices rebound modestly awaiting inventory report

12/10/2014 Crude oil prices rose modestly on the New York market Dec. 9 while analysts awaited the US government weekly inventory report on crude oil and prod...

ExxonMobil forecasts 35% higher world energy demand by 2040

12/10/2014 A significantly bigger global middle class, expanded emerging economies, and 2 billion more people will contribute to 35% higher world energy deman...

MARKET WATCH: Crude oil prices briefly dip to 5-year lows

12/09/2014 Oil prices on the New York and London markets remained volatile, briefly trading around lows not seen since 2009 although prices were attempting to...

White Papers

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...

Accurate Thermo-Fluid Simulation in Real Time Environments

The crux of any task undertaken in System Level Thermo-Fluid Analysis is striking a balance between ti...

6 ways for Energy, Chemical and Oil and Gas Companies to Avert the Impending Workforce Crisis

As many as half of the skilled workers in energy, chemical and oil & gas industries are quickly he...
Sponsored by

AVEVA NET Accesses and Manages the Digital Asset

Global demand for new process plants, power plants and infrastructure is increasing steadily with the ...
Sponsored by

AVEVA’s Approach for the Digital Asset

To meet the requirements for leaner project execution and more efficient operations while transferring...
Sponsored by

Diversification - the technology aspects

In tough times, businesses seek to diversify into adjacent markets or to apply their skills and resour...
Sponsored by

Engineering & Design for Lean Construction

Modern marketing rhetoric claims that, in order to cut out expensive costs and reduce risks during the...
Sponsored by

Object Lessons - Why control of engineering design at the object level is essential for efficient project execution

Whatever the task, there is usually only one way to do it right and many more to do it wrong. In the c...
Sponsored by

Available Webcasts



The Future of US Refining

When Fri, Feb 6, 2015

Oil & Gas Journal’s Feb. 6, 2015, webcast will focus on the future of US refining as various forces this year conspire to pull the industry in different directions. Lower oil prices generally reduce feedstock costs, but they have also lowered refiners’ returns, as 2015 begins with refined products priced at lows not seen in years. If lower per-barrel crude prices dampen production of lighter crudes among shale plays, what will happen to refiners’ plans to export more barrels of lighter crudes? And as always, refiners will be affected by government regulations, particularly those that suppress demand, increase costs, or limit access to markets or supply.

register:WEBCAST


Oil & Gas Journal’s Forecast & Review/Worldwide Pipeline Construction 2015

When Fri, Jan 30, 2015

The  Forecast & Review/Worldwide Pipeline Construction 2015 Webcast will address Oil & Gas Journal’s outlooks for the oil market and pipeline construction in a year of turbulence. Based on two annual special reports, the webcast will be presented by OGJ Editor Bob Tippee and OGJ Managing Editor-Technology Chris Smith.
The Forecast & Review portion of the webcast will identify forces underlying the collapse in crude oil prices and assess prospects for changes essential to recovery—all in the context of geopolitical pressures buffeting the market.

register:WEBCAST



On Demand

Optimizing your asset management practices to mitigate the effects of a down market

Thu, Dec 11, 2014

The oil and gas market is in constant flux, and as the price of BOE (Barrel of Oil Equivalent) goes down it is increasingly important to optimize your asset management strategy to stay afloat.  Attend this webinar to learn how developing a solid asset management plan can help your company mitigate costs in any market.

register:WEBCAST


Parylene Conformal Coatings for the Oil & Gas Industry

Thu, Nov 20, 2014

In this concise 30-minute webinar, participants have an opportunity to learn more about how Parylene coatings are applied, their features, and the value they add to devices and components.

register:WEBCAST


Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected