Gas prices have fallen. This is why inflation doesn’t


Petrol prices have been falling for more than 50 consecutive days, giving drivers much-needed financial support at the pump.

But no one pops the champagne. While gas prices have played a major role in the current period of historic inflation, analysts warn there are a number of factors that will keep overall prices from falling any time soon.

Pump prices may be lower now — the average cost of a gallon of gas has fallen nearly a dollar since its June peak — but the long-term outlook for oil suggests low inventories will keep prices high.

“Russia-Ukraine is a factor, but… we had tight supplies,” said Rob Haworth, senior investment strategist at US Bank Wealth Management. “We would like to see the conflict in Russia and Ukraine end. But I think in the short term we are still dealing with a global economy that is running out of oil.”

Aside from Russia’s war with Ukraine and the sanctions that have disrupted oil exports, the unwillingness — or inability, according to some oil analysts — of members of the Organization of Petroleum Exporting Countries to significantly increase production limits the amount of additional oil coming in. on the world markets. The oil group and its partners, known as OPEC+, announced a small production increase of 100,000 barrels per day for September last week, less than the market had expected.

Another factor is the reluctance of US producers to invest heavily in the extraction and – more importantly – refining of fossil fuels when long-term policy goals point to declining yields in the face of a shift to renewable energy.

“There’s a structural problem with the oil and gas industry and it has to do with refining capacity,” said Jeff Klearman, portfolio manager at ETF firm GraniteShares. “Oil companies, not only in the United States but worldwide, have not expanded their refining capacity. That continues to put pressure on gas prices.”

Peter McNally, global industry leader for industry, materials and energy at investment firm Third Bridge, said there has been “misunderstood criticism” of refinery profits soaring, suggesting investments are being made to convert existing refining facilities to process refineries. biofuels. “These companies are investing for the energy transition,” he said.

Housing is a large part of the average family’s budget, and it is also a large part of the goods and services basket that the government uses to calculate inflation. The way the Bureau of Labor Statistics calculates the cost of housing makes it a very influential component of the consumer price index. Lodging costs include owners’ equivalent rent and main home rent, which indicates how much both homeowners and tenants pay to live in their home. Lodging comprises about a third of the total CPI and about 40% of the core CPI, excluding food and energy prices.

“Housing is important,” said Sam Stovall, chief investment strategist at CFRA Research. “While we are seeing sales of new and existing homes fall, prices have not fallen because there is still more demand than supply.”

Existing house prices hit a new record high of $416,000 in June, up 13.4% from a year ago. A February report from found that at the median, renters earning the typical household income for their area pay nearly 30% of their income in rent, a threshold policymakers consider “rent tax.”

Also, the twin blow of higher prices and increased mortgage rates continues to push home ownership out of reach for many, with more and more families being forced to the sidelines as the impact of the Federal Reserve’s aggressive rate hikes drives up the cost of buying a home.

“Residential prices are likely to remain high and, in a sense, sustain high inflation for longer,” Stovall said.

Since the pandemic, a surge in demand for physical goods has completely disrupted supply chains, grumbled logistics and caused massive price distortions.

“Inflation is primarily caused by excessive demand for too few goods,” said David Dollar, a senior fellow at the Brookings Institution.

This demand led to factory closures in China, leading to increased traffic congestion at ports in the Pacific Ocean. When the ships docked, there weren’t enough workers to unload the cargo or drive the trucks that would carry it first to warehouses and then to consumers.

“Overall demand for merchandise increased quite dramatically, so we suddenly asked our system to handle a lot more stuff,” Dollar said. The result was chaos and sudden cries for workers – at any cost.

“The lack of truck drivers reflects [that] we need more workers than we actually have, and that’s being solved by higher wages,” Haworth said. In June, there were more than three quarters of a million additional workers in the transport and storage sectors than before the pandemic.

Economists expect wage increases, which hovered just above 5% year-on-year, to moderate for the rest of the year. But employers still face a dire shortage of workers, putting pressure on companies to offer competitive salaries to attract and retain talent.

There were 10.7 million open job openings in June, the BLS reported last week. Although it was a record 11.7 million in April, that’s still nearly two vacancies for every U.S. worker without a job.

“What we don’t have clarity on yet is: what is the new post-pandemic norm when it comes to demand? For now, it looks like the wage pressure is kind of there,” Haworth said.

That’s because, unlike supply chains or even whipping commodity prices, inflation that creeps into wages isn’t easily reversed. Even if companies can pay less for components or raw materials, they are unlikely to make wage cuts, so inflation will hang.

“It is strongly correlated with wage growth. That’s not to say higher wages are a bad thing,” Haworth said. “If people have more money, they can buy more things. But when there are actually no more things, the prices go up. Ultimately, that translates into some price pressure on everything else.”

The recent wage increases follow fiscal and monetary policies that have contributed to an economy flooded with liquidity from stimulus payments to individuals and businesses, as well as quantitative easing by the Federal Reserve.

“They injected a lot of money into the system,” Klearman said. Like higher wages, all this money — and too few goods to spend it on — also contributes to price hikes consumers experience for everything from cars to camping gear to cookies.

Despite expectations that inflation is likely to continue through 2023, there are some bright spots.

Not only will Stovall pay less for commuting and groceries, Stovall says high-flying airline tickets could also come back to Earth, and supermarket customers could see the cost of their groceries drop slightly if producers or distributors don’t have to pay as much for transportation. to get their goods on the shelves. “You could see food price competition starting to hit the market as the cost of transportation inputs start to fall,” he said.

While the supply chain continues to gnaw in some industries, General Motors told investors during its quarterly conference call last month that it made 95,000 vehicles in the previous quarter that cannot be finished or sold because the company cannot get the parts it needs. has to finish them – there is a sense that the earlier period of stalemate is waning.

There have also been some high-profile cases of retail price cuts: Walmart and Target both said they needed to cut prices to unload large amounts of unsold inventory that had lingered on shelves as Americans shifted spending back to services like dining out and live events.

There is also renewed, albeit uncertain, hope that President Joe Biden will roll back one or more tranches of the punitive tariffs Trump slapped on China in what experts say was a largely failed attempt to force Beijing to buy more U.S. agricultural products and other key exports. to buy .

An analysis by the Peterson Institute of International Economics estimated that rolling back Trump-imposed and other tariffs over time could reduce inflation by as much as 1.3 percentage points, saving the average American household nearly $800 a year. .

“It would certainly be smart to do away with the tariffs now,” Dollar said. “They’re not hitting any target and they’re being paid by American households.”

Leave a Comment