Weekly Economic Trends and Indicators
If you feel like the price of gasoline has been rising lately, it is not your imagination. After spending most of the past nine months in a fairly tight range, U.S. retail gasoline prices broke out of that range in August, rising to $3.954 per gallon. This is approximately the same price we saw a year ago as the market was adjusting back down from the sharp spike in the price of gas which was driven by domestic inflationary pressure and exacerbated by the Russian invasion of Ukraine. What does this sudden rise in the price of gas portend for the fight against inflation and economic prospects for the rest of this year and next year?
The price of gasoline is perhaps the most visible indicator of energy prices, but it is only part of the story. The most important contributor to changes in the price of gasoline is the price of crude oil. The benchmark oil price in the U.S., West Texas Intermediate (WTI) crude oil, closed the week at $91.20 per barrel and seems to be heading toward $100 per barrel. We have seen these levels previously. In fact, WTI hovered around $100 for a few years in the early 2010s before suddenly dropping back to around $50 in 2015 due in part to oversupply by OPEC and advances in hydraulic fracturing which dramatically increased U.S. oil production.
After briefly crashing in 2020 due to COVID-19 shutdowns, WTI rebounded sharply back toward $100 as worldwide inflationary pressures kicked in. As the Federal Reserve began fighting inflation in 2022, the market reversed. The price of oil is notoriously one of the most volatile commodity prices and is subject to wild swings in response to changing expectations. The growing concerns about recession in the U.S. as a result of the Fed’s interest rate hikes brought WTI back down to earth starting in the second half of last year.
However, there have been some contrarian voices who believed that the U.S. might escape a recession with a “soft landing” scenario. A stronger economy translates to greater demand for oil—and it is not only the U.S. that we need to consider. While the Chinese economy has shown signs of weakening for most of this year, there are recent indications that policy decisions have had some positive impact.
The rise in the price of oil made itself felt in a trio of economic indicators last week. The consumer price index, producer price index, and the index of import and export prices all rose sharply, and in each case, oil and gasoline prices were the main factors. This provides an illustration of just how difficult policymaking can be. It is quite possible that higher oil prices will mean the Fed raises interest rates a little higher than expected. The European Central Bank raised its rate again last week. While this move was not entirely unexpected, it solidified the fact that central banks are having to work a little harder to contain inflation.
To a certain extent, we are a victim of our own success as some of the drop in inflation at the beginning of this rate-hiking campaign was due to expectations of a possible recession. If that recession fails to materialize, we will have to fight harder to counter the higher-than-expected demand for oil. This means higher interest rates for a longer period of time.
Next week: Recap of Federal Reserve decision and looking ahead to the 4th quarter
