Avi Zaltzman, Barron’s

NEW YORK
EnergiesNet.com 02 23 2023

Energy prices are heading in the right direction to beat inflation, but they are less likely to make a big dent than it might seem.

Natural-gas prices recently fell to their lowest levels in more than a year. At $75 per barrel, U.S. oil is down 39% from its highs last year, and getting close to its 52-week low.

“If someone showed you the charts of oil and natural gas and gave you no other information regarding the state of the economy, the last thing on your mind would be inflation,” wrote Bespoke Investment Group in a note this week.

Yet the personal-consumption expenditures price index rose 5.4% in January, an uptick from 5.3% in December, data disclosed Friday show.

The problem is that despite all the talk about energy driving inflation last year, prices for energy make up a relatively small portion of the gauges that the Federal Reserve watches. The way they affect overall inflation is less pronounced than it seems, according to one recent paper.

Although high oil prices contributed to inflation last year, “there is strong evidence that rising energy prices were not the main determinant of the surge in US consumer price inflation,” wrote Lutz Kilian and Xiaoqing Zhou, both of whom work at the Federal Reserve Bank of Dallas. A summary of their findings was published by the European nonprofit Centre for Economic Policy Research this month.

Gasoline, in particular, soared last year, with national averages briefly rising above $5 per gallon, and even exceeding $6 in some states. With prices at the pump posted prominently along roads, gasoline became the most potent symbol of inflation. President Biden made lowering prices a priority.

But Kilian and Zhou note that motor fuel accounts for about 4% of inflation, considerably less than food or housing. Spikes in oil prices have historically caused only temporary increases in overall inflation, and the costs of other energy products are also relatively small. “The share of spending on natural gas and electricity is even smaller than for motor gasoline and consumer spending on diesel fuel and jet fuel is negligible,” they wrote.

The bigger question is how much changes in energy prices ripple through the economy. The conventional view is that diesel prices, for instance, tend to raise the cost of transporting goods by truck, and that expense is passed along to stores and then consumers. In addition, rising gasoline prices can theoretically lead workers to ask for pay increases, and cause overall wage inflation to rise.

The evidence doesn’t show substantial impacts from those dynamics, the researchers concluded after doing an analysis of past price changes. A one-time gasoline price shock can cause inflation to spike for a couple of months but after that becomes “indistinguishable from zero.” And even after examining the cumulative effects of gasoline price increases, they found the impacts on total inflation were “modest at best and at times negligible.” In addition, the effect of gasoline price shocks on “core” inflation, which takes out the direct impacts of changes in food and energy prices, was essentially zero.

Kilian has made a similar argument about inflation in the early and late 1970s, which also coincided with high oil prices. Long lines at gasoline stations are one of the lasting images from that period.

In a previous paper, published by the National Bureau of Economic Research, Kilian and another researcher wrote that the oil embargo of 1973 was preceded by increases in the price of other industrial products. “These price increases do not appear to be related to commodity-specific supply shocks, but are consistent with an economic boom fueled by monetary expansion,” they wrote.

Write to Avi Salzman at avi.salzman@barrons.com

marketwatch.com 02 23 2023