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

BP Energy Outlook projects energy demand to jump 37% by 2035

02/17/2015 Global demand for energy is expected to rise by 37% from 2013 to 2035, or by an average of 1.4%/year, due in large part to ongoing economic expansi...

MARKET WATCH: Brent crude oil reaches above $62/bbl

02/17/2015 The April ICE contract for Brent crude oil prices rose modestly in London to settle above $62/bbl on Feb. 16 while the New York Mercantile Exchange...

MARKET WATCH: NYMEX crude oil prices near $53/bbl

02/16/2015 US light, sweet crude oil prices closed more than $1/bbl higher on the New York market Feb. 13, and Brent crude oil prices settled more than $2/bbl...

Deloitte studies oil supply growth for 2015-16

02/16/2015 A Deloitte MarketPoint analysis suggested large-field projects, each producing more than 25,000 b/d, could bring on 1.835 million b/d in oil supply...

MARKET WATCH: NYMEX crude oil price jumps more than $2/bbl

02/13/2015 Crude oil prices on the New York market jumped by more than $2/bbl Feb. 12 to settle above $51/bbl, which analysts attributed to more oil and gas c...

Apache’s 2015 capital budget less than half of last year’s $8.5 billion

02/12/2015 Apache Corp., Houston, plans a capital budget of $3.6-4 billion in 2015, with $2.1-2.3 billion directed toward onshore North America and $1.5-1.7 b...

Total reduces budget by 10% to $23-24 billion

02/12/2015 Total SA plans to lower its organic investments to $23-24 billion in 2015 from $26.4 billion in 2014 by reducing spending in brownfield development...

MARKET WATCH: NYMEX crude prices drop back below $50/bbl

02/12/2015 The New York Mercantile Exchange March crude oil contract dropped $1.18 on Feb. 11, closing at $48.84/bbl. The April contract dropped $1.15 to $50....

US House vote sends Keystone XL approval bill to Obama’s desk

02/12/2015 The US House of Representatives voted by 270 to 152 to pass S. 1, which would deem the proposed Keystone XL crude oil pipeline approved more than 6...
White Papers

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by

The impact of aging infrastructure in process manufacturing industries

Process manufacturing companies in the oil and gas, utilities, chemicals and natural resource industri...
Sponsored by

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
Available Webcasts

On Demand

Global LNG: Adjusting to New Realities

Fri, Mar 20, 2015

Oil & Gas Journal’s March 20, 2015, webcast will look at how global LNG trade will be affected over the next 12-24 months by falling crude oil prices and changing patterns and pressures of demand. Will US LNG production play a role in balancing markets? Or will it add to a growing global oversupply of LNG for markets remote from easier natural gas supply? Will new buyers with marginal credit, smaller requirements, or great need for flexibility begin to look attractive to suppliers? How will high-cost, mega-projects in Australia respond to new construction cost trends?

register:WEBCAST


US Midstream at a Crossroads

Fri, Mar 6, 2015

Oil & Gas Journal’s Mar. 6, 2015, webcast will focus on US midstream companies at an inflection point in their development in response to more than 6 years shale oil and gas production growth. Major infrastructure—gas plants, gathering systems, and takeaway pipelines—have been built. Major fractionation hubs have expanded. Given the radically changed pricing environment since mid-2014, where do processors go from here? What is the fate of large projects caught in mid-development? How to producers and processors cooperate to ensure a sustainable and profitable future? This event will serve to set the discussion table for the annual GPA Convention in San Antonio, Apr. 13-16, 2015.

This event is sponsored by Leidos Engineering.

register:WEBCAST


The Future of US Refining

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

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


Emerson Micro Motion Videos

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