March 18, 2019 — As Oil Prices Tick Up, Inflation Starts to Move

MARCH 18, 2019 – AS OIL PRICES TICK UP, INFLATION STARTS TO MOVE

Oil prices have started to rally lately, which is starting to effect inflation expectations.  The inflationary news counters the slowdown in February hiring and the disappointing retail sales numbers at the end of 2018.  Inflation expectations have fallen in the last six months, which has become a concern to the policy makers.

The Fed’s target 2 percent inflation rate has fallen short in the last eight of nine years.  Could the rise in oil prices jump start short term inflation? Oil prices in conjunction with rising wages are expected to move inflation in the medium term.  Crude oil is up 27 percent, year to date. There has been, historically, a 92 percent correlation between gas prices and 12-month ahead inflation; gasoline has always shown a much greater direct relationship with inflation than any other CPI subcategory.  One downside of rising gas prices, is it will cut into consumers’ discretionary spending which rebounded slightly in January.  The hope is rising wages will compensate.

Contact us if you’d like to learn more about guarding against rising interest rates and oil prices through the use of hedges.

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