Oil Isn’t Participating in Near-Term Inflation Expectations
The Fed kept rates steady in the most recent FOMC meeting but their worry continues to be the threat to unemployment along with pressures for higher inflation. Thus far, inflation expectations haven risen over the short-term but are well contained when looking over a longer horizon at the 5 and 10 year breakeven inflation rates.
Oil has seen a 19% drawdown year to date. From the demand side, a weakening global economy raises concerns. From the supply side, OPEC+ has recently decided to increase production. Both of these have been headwinds to the price of oil. A cheaper US dollar is frequently helpful, but that doesn’t seem to be the case of late.
In an environment of heighted inflation expectations, one consolation is that oil prices are not participating. Despite being only around 3% of the overall CPI inflation bucket, it does impact the consumer. President Trump wants low oil prices, and so far that remains the case.