FXStreet (Guatemala) – Analysts at Brown Brothers Harriman explained that the oil prices have fallen to new lows following news of the unexpected 2.68 mlm barrel build of US crude oil inventories.
Key Quotes:
“The API data had prepared the market a small draw down. Many view the sharp drop in oil prices through the lens of the inflation/deflation. For example, this is the traditional view of the ECB. It hiked rates in mid-2008, between Bear and Lehman’s demise ostensibly because the near-$150 barrel of oil was going to be inflationary.
Looking at the lens through the other side, the drop in oil prices is said to be deflationary. Many argue that Fed should not raise rates because of this deflationary impulse. Unlike most central banks, the Fed targets core inflation, which excludes both food and energy. The July FOMC minutes reiterated how Fed officials view the impact of the drop in oil. Most officials thought the downward pressure on inflation from energy (and the dollar) would abate over time.
The point is that Fed officials see the core rate to be the signal, while headline inflation is noisy. Over time, for the last half century and more, headline inflation in the US has converged with core inflation, and not the other way around. The July FOMC minutes echo this: most officials thought the downward pressure on inflation from energy (and the dollar) would abate over time.
Higher oil prices, we have often been told, acts like a tax on consumers, and a regressive one at that. The more it takes to heat the home and fill the car with gasoline, the less money a household has to buy other goods. Similarly, the drop in oil prices, some, even if not all is passed to the consumer. This is tantamount to a tax break.
American financing about a 3% annual rise in consumption, which is a bit more than average hourly wage increases and without using revolving credit (credit cards) very much. Lower oil prices are generally good for the US, even if not for all regions or sectors.”
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