The big drop in oil prices is great news for consumers and the war on inflation. It may take a little longer to help. Oil rallies on Friday. But these gains – which come amid speculation that production cuts may be proposed at the next OPEC meeting to stem the decline in prices – cannot hide that oil is in a bear market, down 20% since late September. The reasons for the decline include higher-than-expected increases in crude oil inventories in the United States and slowing demand from China. Even the war between Israel and Hamas does not raise oil prices. Oil is $9 lower than when Hamas invaded Israel, S&P Global vice president Daniel Yergin said on “Squawk Box.” “There is absolutely no geopolitical fear in the price of oil,” he told CNBC’s Becky Quick. This drop in oil is not good news for oil investors. Chevron was the only stock in the S&P 500 at a 52-week low Thursday, but it’s great news for those looking to push the “inflation is coming down” story. The price of oil and gasoline figure into the consumer price (CPI) and other inflation indicators in several ways. Gasoline prices are approximately 4% of the total index. Additionally, higher oil prices contribute to inflation by directly increasing the cost of inputs, such as packaged food. In testimony before the US Senate Banking Committee in March 2022, Federal Reserve Chairman Jay Powell said that, as a rule of thumb, every $10 per barrel increase in the price of oil raises inflation by 0.2% and declines economic growth by 0. ,1% It would seem reasonable to assume that the opposite is true: falling oil prices will reduce inflation. Reasonable, but may not be perfectly symmetrical. Energy analyst Andy Lipow tells me that while it’s reasonable to assume that falling oil prices will reduce inflation, falling prices may not reduce inflation as much or as quickly as rising prices increase inflation. “When oil prices go up, suppliers are very quick to pass on the price of gasoline and diesel to consumers,” he said. “When oil prices fall, we don’t see petrol and diesel prices fall as quickly – certainly not at the retail level.” He said that this delay occurs with all energy users. “Industrial energy users are also very quickly passing the increased price of oil into the cost of the goods they manufacture and services they provide. Railroads and trucking companies are imposing fuel surcharges quite quickly – measured in days and weeks rather than months. And while railroads and large trucking companies can quickly reduce their fuel surcharges, “in some cases higher costs stick around for local deliveries.” Bottom line: “In theory, prices should be going down. In reality, it takes a long time for that to happen.”
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