Peak Inflation Watch - Oil Edition: 24 May 2022

May 24, 2022 2:00 PM ETTBT, TLT, TMV, IEF, SHY, TBF, EDV, TMF, PST, TTT, ZROZ, VGLT, TLH, IEI, BIL, TYO, UBT, UST, PLW, VGSH, SHV, VGIT, GOVT, SCHO, TBX, SCHR, GSY, TYD, DTYL, EGF, VUSTX, DTUS, DTUL, DFVL, TAPR, DFVS, FIBR, GBIL, UDN, USDU, UUP, RINF, AGZ, SPTS, FTSD, LMBS, DBE, RJN, JJE, JJETF, USO, DBO, USL, BNO, OLEM, OILK, USOI, OLOXF, OILX8 Comments4 Likes
James Picerno profile picture
James Picerno
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Summary

  • The influence of energy prices is always a significant input for consumer inflation, and that’s certainly been true recently.
  • The spike in oil has eased in recent months, which implies that headline CPI will decline in the months ahead.
  • It’s also possible that energy markets will again spike because of the Ukraine war or some other factor that affects global oil supplies.

Oil Or Gas Transportation With Blue Gas Or Pipe Line Valves On Soil And Sunrise Background

onurdongel/E+ via Getty Images

There are many factors that drive consumer price inflation, but at the headline level, the oil factor is often the first among equals. By that standard, the recent pullback in the price of crude hints at the possibility that we've seen the summit for inflationary pressure at the headline level.

The influence of energy prices is always a significant input for consumer inflation, and that's certainly been true recently. In the current April report on CPI, the US Bureau of Labor Statistics advises that energy was an outsized influence.

consumer price index CPI

U.S. Bureau of Labor Statistics

Although there's a strong case for modeling inflation's trend on a core basis (stripping out food and energy prices) to identify the trend, it's still useful to monitor how headline pricing (inclusive of food and energy) ebbs and flows. On that basis, here's a quick look at estimating headline CPI via oil.

To strip out some of the noise let's review how the spot price for West Texas Intermediate (WTI), the US oil benchmark, evolved in year-over-year terms vs. the annual pace of the Consumer Price Index (CPI) at the headline level. On the assumption that oil prices provide a near-term forecast of CPI, the chart below compares crude on a 3-month-forward basis vs. inflation. The main takeaway: the spike in oil has eased in recent months, which implies that headline CPI will decline in the months ahead.

US Consumer Inflation WTI Oil

Author

For a clearer view of the relationship, the next chart compares CPI and oil on a scaled basis so that the data is presented on a directly comparable level.

US Consumer Inflation WTI Oil

Author

Despite the close relationship, there's no guarantee that inflation will soften in the near term. Even if it does, inflation still looks set to remain high relative to the pre-surge period before the pandemic. It's also possible that energy markets will again spike because of the Ukraine war or some other factor that affects global oil supplies. But for the moment, the energy market appears to be foreshadowing a moderately lower rate of headline inflation in the near term.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

James Picerno profile picture
5.55K Followers
James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers. Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg Markets, Mutual Funds, Modern Maturity, Investment Advisor, Reuters, and his popular finance blog, The CapitalSpectator. Visit: The Capital Spectator (www.capitalspectator.com)
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