Consistent with the Fed’s algorithm, declining oil prices are driving lower inflation as reflected by a recent CPI print improvement.
Recent declines in energy prices are helping with inflation, consistent with the Fed’s rule of thumb that every $10/barrel price increase raises inflation by +0.2% & subtracts -0.1% from economic growth. Oil prices have declined -$40/barrel over the last 6 months after peaking at $120/barrel during the summer & this translates into an approximate -0.8% improvement in inflation and a +0.4% boost in GDP. If oil prices were to decline to 2019 levels, this would represent another $20/barrel improvement, helping inflation & GDP growth even more. This should be an economic policy priority!
This brings us to the recent CPI print, with a +7.1% y/y increase reported for November looking pretty good compared to the +9% peak in June. While lower energy prices cannot fully account for this -1.9% CPI improvement, they certainly help. Notably, the Fed is primarily focused on PCE as an inflation gauge (as opposed to CPI) which improved from its +6.98% June peak to +6.02% in November (latest available data). The important point is that inflation is moving in the right direction – so long as energy prices cooperate.