Another decline in import and export prices will likely have the Fed pulling its hair out. A pair of charts will explain why.
West Texas Intermediate Crude Price
Crude is in a bear market, down about 22% since the December high. Price is lower in four consecutive months and five out of the last six.
On June 15, I reported Import Prices Dip, Export Prices Plunge.
Let’s explore the import/export price relationship to crude.
Import and Export Price Indexes vs. Crude
Don’t be confused by the Fred titles that say “all commodities”.
The BLS says Import/Export Price Indexes contain “data on changes in the prices of nonmilitary goods and services traded between the U.S. and the rest of the world.”
Popular Reasons Not to Worry
- It’s transitory
- Kudlow says “Lower oil prices are unambiguously good for US economy”
- What people don’t spend on gasoline, they will spend elsewhere
- We have plenty of inflation elsewhere
- More QE baby! Bring it on!
- All of the above
Mike “Mish” Shedlock
The winds of deflation are beginning to blow.
And the Fed is talking about “normalization”.
LOL…
A typical car fills up about once a week for $40 / fill up (I know there are trucks and long distance commuters, but I am talking about the average family car).
$40 times 52/wks ==> $2080 in gasoline per year.
The same typical family spends that per month on Obamacare insurance (and the sky high deductible means they spend a lot more if they ever need a band aid).
If oil / gasoline prices were to be cut in half (lets assume greedy selfish politicians or corrupt enviro-terrorists don’t increase gasonline taxes) … it would almost compensate for 2 months of Obamacare increases.
Lower gasoline prices, if they flow through to consumers, won’t cause deflation. They will barely scratch the surface of rampant inflation that doesn’t show up in CPI or PCE propaganda.
In real life, inflation continues no matter how hard the Fed tries not to see it.
LOL Bam Man!
Just sign me “Fed up with the Fed!”
“Another decline in import and export prices will likely have the Fed pulling its hair out.”
…
May I make a suggestion? …. Tough Blade
Deflation on the way … might as well go chrome dome …
I’m seeing tremors in my economic coffee cup, I can’t point to any one event, trend or cause, still something is a-foot.
yep … i’ve felt the same past month.
I will be surprised if bond yields aren’t a lot lower come Labor Day.
yep.. I’ve felt the same way every day for almost 40 years. Expect I will feel the same way every day for the rest of my life.
yep … my goat entrails vs your model.
should be fun 🙂
I don’t have a predictive model… but I’ll put my tea leaves up against your goat entrails any day of the week.
Apparently the Fed thinks its mandate is to take 100% of any savings resulting from productivity or technology gains, plus 2% of the overall price every year and dispose of it in the form of their own credit emissions. What a racket!
From Bloomberg titled “Amazon Has at Least One Fed Official Rethinking Inflation…Chicago Fed president ponders technology-induced disinflation…Fed policy may need to be easier if competition curbs prices.”
Evans: “I can’t say that the Phillips Curve isn’t going to lead to higher inflation, but I worry that it’s very flat and it’s not going to….If that’s the case — and I think that’s just speculative at this point — then it means we need even more accommodation to get inflation up”
Well, if there’s a conflaguration in syria or elsewhere in the middle east, maybe that will help boost oil prices and get those inflation numbers moving again ?
Of course, if things get out of hand, well then, no worries about anything or anybody.
Win Win. Right ?
The Fed is trying to make inflation go higher. When their problem is that they have a faulty gauge for measuring it.
The rest of us in the real world are already suffering under plenty of inflation, thank you!
Their hair is already on fire.
Yahoo article: Ultimately, if the unemployment rate continues to fall and inflation doesn’t respond, the Phillips Curve may fall further out of favor as a guide to inflation dynamics, and by extension, interest-rate policy, as Evans hinted at Tuesday in a follow-up interview on CNBC.
“If that’s the case — and I think that’s just speculative at this point — then it means we need even more accommodation to get inflation up,” he said.
https://yhoo.it/2sNC7lr
If rates are held with no further increases this year they can still try to reduce the balance sheet with a similar sort of tightening effect.
I can’t see them stopping anyway until something breaks.
That something that breaks could very well be the Fed.
The price of oil reverberates far beyond the price at the pump. But,I will say that I haven’t seen a comparable decrease at the pump…. I am sure it is just around the corner, though.
Plastic and chemical prices typically fall with with falling oil prices. But so does employment levels in many sectors tied to oil and gas. And then airline profits typically go up. Many more effects.
The whole industrial infrastructure related to conventional oil takes a bath.
I wonder if there would be mileage in increasing tax on gas to maintain the price at the consumer. Revenue increase to the State, inflation maintained as desired and cover for rate rises. A formula that varies with input price and rises p.a. as needed and falling back during periods of higher input prices.
Methinks that would surely send “gasoline” usage into a death spiral……
Gail Tverberg wrote an excellent article on her website “Our Finite World” that explains what is happening to oil and how it is affected by falling interest rates. I recommend it for those interested.
Problem is that the premise of the article dictates a high positive correlation between interest rates and commodity prices (particularly oil), then the author never specifies the correlation – because there is little to none.
I’ve seen oil move lock-step with equities (always temporary – and more accurately it was equities moving to oil), but never rates.
If you read the whole article you would see she is saying peak economy is dictating peak oil and interest rates have allowed the industry to get hard to reach oil cheaper. Thus increasing rates would increase cost and either depress inventories or raise costs which would increase prices. We have reached peak economy and this will drive price down. The price of oil can only go as high as the economy can afford.
But lower interest rate s don’t make hard to reach oil easier. High oil prices do that.
I was at an oil and gas conference a few years ago and was talking to a guy with a new start up working to produce from old fields. Indicated to me that 90% of the crude was still in the ground in the US. Just saw an article where new technology was being used to produce from an abandoned field with heavy oil reserves. Now this is in place and operating and they expect to have significant production from this abandoned field. Now get this number — they expect to go in and produce 2 trillion barrels from abandoned fields in the US. Talk about deflationary if true.
We are entering a supply glut for crude oil and natural gas liquids as well as natural gas.
Demand always lags supply. That is the lower prices created by excess supply take time to generate the demand to soak-up that supply. But there is NEW Supply Growth yet to hit the market and that will prevent demand from catching up.
$35/barrel is more likely than $48/barrel.
US has surplus labor, capital, and energy. The problem is confiscatory taxes on work, savings, and investment. President Trump has something for that.
Four factors are holding back the US. The first is the growing socialist/communist thinking over the last 40 years. The price of government which is probably 10 times higher than it should be. The price of real estate which is also ten times higher than if should be due to the Federal Reserve and bankers. Lastly the military, industrial and security complex which is part of the second reason.
3.What people don’t spend on gasoline, they will spend elsewhere.
http://ww4.hdnux.com/photos/43/53/17/9352159/5/1024×1024.jpg
Nicely said. A picture is worth a million words!
“The most hated bull market: chance of a lifetime.” https://www.armstrongeconomics.com/markets-by-sector/stock-indicies/dow-jones/the-most-hated-bull-market-in-history/
Sorry folks, you are all wrong. Nikkei-like advance in the Dow is coming.
Chance of a lifetime?
Idiotic comment after this rally
Bitcoin 5 years ago was a chance of a lifetime
“Bitcoin 5 years ago was a chance of a lifetime”
So were tulip bulbs some centuries ago…..
But consider which three countries have by far and away the largest reserves of natural gas. Russia, Iran and their new best mates, Qatar. If the morons in Washington and Brussels keep peeing off Vlad I can see the price of natural gas heading north. He’s also along with his other best mates, the Chinese, cornering the physical gold market.
Oil is not a free market, since select foreign national oil companies manipulate prices in an effort to influence regional and world events. Oil price is not an accurate metric of the status of the global economy.
Deflation would be such a blessing, if it ever happened. Unfortunately bankers are printing medical inflation to the moon. Along with outrageous service inflation in general.
Spot month on Nymex alone traded 145.000 contracts yesterday. That would be an impressive market for someone to manipulate.
Where is the deflation??!! You have been screaming it for hundred years. Sooner or later, it should show up in prices, right? Where? Rents are higher (wayyyy higher in some places), insurance premiums are higher, deductibles are higher, grocery prices are higher, college expenses are higher, daycare expenses are higher and on and on and on.
Where the hell is the deflation you are always screaming about?