Wednesday, October 29, 2014

Estimated Effect of Lower Energy Prices on Inflation

The current growth in domestic oil production will mean, short-term, a decline in energy prices. In the chart below the impact, on the core CPI inflation index, of this energy sector decline can be seen via Capital Economics forecasts.

I must hasten to add, however, the CE forecasts do not take into account the eventual decrease in the desire to hold cash balances which will act as a countervailing force to downward pressure on CPI as a result of increases in energy productivity.

Also, note well that even after taking into account the downward pressure on prices because of the energy boom, CE is still forecasting that price inflation by the end of 2016 will be significantly above the Fed's "target" inflation rate.

They are correct that price inflation will intensify even with the gains in energy productivity, however, it is likely to intensify sooner than CE is forecasting and the climb is likely to be much stronger.

1 comment:

  1. I've always wondered why Inflation is considered by Keynesians to be good for the economy, but higher energy costs are devastating.