The volatile nature of energy prices makes it difficult to say how recent oil price movements will impact the longer-term outlook for inflation.
Cleveland, OH (PRWEB) November 19, 2014
Oil prices have declined significantly in recent weeks, reaching levels not seen in several years. Will the low oil prices keep inflation rates persistently low?
Using inflation nowcasts produced by the Federal Reserve Bank of Cleveland, Bank researchers Ben Craig and Sara Millington gauge the impact of recent oil price changes on the near-term inflation outlook. They find that declining oil prices decrease nowcasts for headline CPI and headline PCE, while core CPI and PCE, which are isolated from direct energy swings, remain steady at around 1.5 percent.
The Cleveland Fed’s daily nowcasts provide forecasts of the current period’s rate of inflation before the official data are released. To learn more, watch this 4-minute nowcasting video or go to Inflation Nowcasting.
Craig and Millington say the volatile nature of energy prices makes it difficult to say how recent oil price movements will impact the longer-term outlook for inflation. The two most likely channels through which oil price changes can impact inflation are through retail gasoline prices and producer prices. However, the researchers note that, as consumers use savings from lower energy prices to purchase other goods and services, the prices of those other goods and services are likely to rise, offsetting the initial disinflationary impact of lower oil prices.
The researchers also point out that the inflation rate over the longer run is primarily determined by monetary policy, rather than by movements in individual price components.
And for all things inflation, visit Inflation Central.