Energy, Inflation and the Economy, The Times They Are A Changing
- The March Consumer Price Index increased by 0.3 percent, less than February’s 0.4 percent gain.
- The core CPI increased by 0.2 percent, and is up 2.3 percent over the last year.
- The energy component of the CPI increased by 0.9 percent in March, well below February’s 3.2 percent.
Overall consumer prices for March were about as expected, increasing by 0.3 percent and breaking the short trend of higher monthly increases over the previous two months. February’s 0.4 percent gain was largely fueled by higher energy prices, which increased by 3.2 percent for that month. In March, energy prices gained just 0.9 percent despite larger price hikes at the gasoline pump. According to the Bureau of Labor Statistics, which compiles the CPI report, unleaded regular gasoline prices increased by 8.2 percent in March, before seasonal adjustment. However, gasoline prices normally increase through the spring as refiners switch from winter-time blends and perform maintenance. After seasonal adjustment, unleaded regular gasoline prices went up by just 1.7 percent according to the BLS. The feedstock for gasoline, crude oil, has already come down in price after peaking at $110 per barrel in late February. The spot price for West Texas Intermediate crude oil retreated to $102 per barrel by early April. According to AAA, non-seasonally adjusted gasoline prices have already crested at about $3.95 a gallon and are now retreating slowly. Barring a flare-up of geopolitical tensions in the Middle East, gasoline prices will continue to moderate through April. Because the seasonal adjustment factors are positive for gasoline in the springtime, after seasonal adjustment gasoline will likely show a large price decline in April. Long story short, barring a change in geo-politics or a disaster, the inflationary push from higher oil prices is over, and it was not that large to begin with.
The other wrinkle in the energy price story involves natural gas. Just four years ago, in the summer of 2008, natural gas prices spiked to $12.69 per million BTUs at the Henry Hub (which connects a group of natural gas pipelines that run through Louisiana). Now, natural gas prices are down to $1.89 per million BTUs. After adjusting for overall inflation, real natural gas prices are stunningly low. This has held the energy component of the CPI, which includes natural gas for household heating and cooking, down at exactly the time that the energy index was under upward pressure from gasoline prices. Moreover, with warm winter weather, households that heat their homes with natural gas have received a double break, low prices and low consumption, making for very low utility bills. In fact low utility bills were in part responsible for the sluggish consumer spending seen in 2011Q4 GDP. This will likely show up again in the first estimate of 2012Q1 GDP due out April 27. Looking backward, the drag from high oil prices on the U.S. economy has been calculated at an elasticity of -0.19. That is to say that a 10 percent increase in oil prices leads to a net 0.2 percent decline in real GDP over 4 quarters. Will that be true 10 years from now? Likely not. As the U.S. evolves from a net energy importer to a net energy exporter we may see a neutral or even positive economic impact from higher energy prices. The times they are a changing.
Market Reaction: Equity markets opened with losses. Treasury yields are down at both ends of the yield curve. Oil futures are down to $102.82/barrel. The dollar is up against the yen and the euro.