How Does Higher Interest Rates Lower Oil Prices?

Jun 14, 2022 | Ask "Z" Economist

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Summary: If you say something enough times, and emphatically enough, people are likely to believe the silliest things. This chart shows the real drivers behind the +8% CPI headline number, with the cost of necessities like gas, groceries, utilities and electric up a crippling +25% y/y. Many people understand this, at least intuitively, but what they fail to ponder is how Fed interest rate hikes are going to lower the price of things like oil, food and electric generation. We have a supply shock price increase in these goods, not inflation in the essentials driven by overheated demand. If excess demand was the driver of these crazy price increases, then higher rates would help temper demand, helping lower prices to equilibrium. But does it make sense for the Fed to bludgeon lower already tepid demand (-1.4% 1Q22 GDP) by hiking rates when the problem is that the economy lacks a sufficient supply of common necessities. How does higher interest rates lower gas prices? By eliminating demand for oil from people bankrupted by higher interest rates. Our society can do better by working hard to increase supply rather than lowering prices by impoverishing the populace.

CPI Graph

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