Oil and gas prices have fallen more quickly than autumn leaves in the past few weeks, which has helped improve the US economic outlook.
While the US Energy Information Administration forecasts higher heating fuel prices for the coming winter months, it also anticipates prices will be lower than in the comparable 2004-05 period. Winter heating demand could raise the cost of West Texas Intermediate crude to $67/bbl by January from an average $63.80/bbl during September, EIA said.
That would still be less than this past summer’s peak price-enough, some economists and policymakers say, to ease concerns about inflation. Oil prices apparently haven’t ignited inflation yet, and it’s reasonable to wonder why. The standard explanation is that the US economy is more diverse and relies less on cheap energy than it did in the 1970s and ‘80s, when businesses passed through higher energy costs as increased prices for goods and services.
Obvious increases
But it’s not completely immune. Higher fuel costs in 2006 led to higher prices for airline tickets, refuse collection, and other energy-intensive services, noted Donald L. Kohn, vice-chairman of the Federal Reserve Board. Such services represent a small part of the core consumer price index, and the small acceleration of prices in other nonshelter sectors, “while consistent with a small pass-through of energy costs, could be attributed to nonenergy factors,” he said at New York University on Oct. 4.
Kohn said energy price pass-throughs were much more evident before 1980, when US monetary policy not only accommodated them but also allowed second-round effects to become embedded in more persistent inflation increases.
“Since the early 1980s, the pass-through to core prices has been limited or nonexistent, at least in part because households and firms have expected the Federal Reserve to counter any lasting inflationary impulse that they might produce,” he said.
Reduced reactions
Oil price movements were more persistent before 1980 than they were after-until recently. “Households and firms probably expected deviations of energy prices from long-run averages to be largely reversed and saw less reason to try to adjust wages and prices in response to what they viewed as transitory changes in energy costs,” Kohn suggested. He said there probably have been some pass-throughs recently as wage and price decision-makers began to believe higher energy costs would not be reversed soon. “But the magnitude of the effect has been small-perhaps on the order of a half percentage point or less since the end of 2003,” he said. Kohn said consumer energy prices flattened during August and probably will register a big decline when the US Bureau of Labor Statistics releases its next consumer price index on Oct. 18. Such a decrease will not erase the past few years’ increases, he went on, but it could reduce consumers’ fears that continued energy price increases will set off higher long-run inflation.
