Oil Decline Will Change The Inflation Picture

By Bryan Rich

November 13, 5:00 pm EST

In the past two notes, I’ve focused on oil.  And that does indeed seem to be the tail that is wagging the global markets dog.

Oil lost another 8% today.  Over the past 31 days, crude prices have dropped 27%.

If we look back over the past five years, the magnitude of that move is only matched (or exceeded) in cases where there was significant manipulation in the oil market and/or a systemically threatening oil price crash.

  nov12 oil

You can see in the chart above, we’ve dropped 27% over the past 31 days.  The other big drops in crude were in February of 2016 (the crash) and in November of 2014 (OPEC’s refusal to cut oil production).

Interestingly, these historic crude price declines were occurring as the Fed was preparing markets for the beginning of its normalization campaign (i.e. moving rates away from the emergency zero interest rate level).  And it was these price declines that threw a wrench in those plans.

Despite what the central bankers say, oil prices have a big influence on their read on inflation.  Lower oil prices put downward pressure on inflation.  And as oil prices were plunging from 2014 through 2016, the Fed clearly and dramatically held back on their rate hiking plans.

On that note, remember yesterday we talked about the prospects that Powell (Fed Chair) may use the opportunity to dial down expectations of a December rate hike, if we see some soft data this week (growth data from Japan and Europe and inflation data from U.S., Europe and UK).  We now have a big haircut on oil prices to factor into the inflation data.  That too, may give him the excuse to pause on rates.  We’ll hear from him tomorrow at a Dallas Fed meeting.

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