The good news is that oil and gas prices have peaked. The bad news is that inflation will continue to be at record highs. That means President Biden blaming today’s inflation on Putin is simply not correct.
Biden recently said, “Today’s inflation report is a reminder that Americans’ budgets are being stretched by price increases and families are starting to feel the impacts of Putin’s price hike. A large contributor to inflation this month was an increase in gas and energy prices as markets reacted to Putin’s aggressive actions.”
Truths, Untruths … and Biden
His statement is simply not true. The Consumer Price Index (CPI) increased by 0.8% in February, which raised the yearly inflation rate to 7.9%. The data for that number is mostly gathered in the first 20 days of the month. Putin did not invade Ukraine until February 24.
On February 20, the price of oil was $91 per barrel. That price was about 40% higher than the price on December 1 and had nothing to do with Putin. Rather, the Putin-related price hikes occurred after the February 24th invasion of Ukraine, so the higher oil prices reflected in the February CPI number were a result of Biden’s energy policy coupled with rising demand due to the strengthening economy.
Most recently there is some good news for consumers. Oil prices have probably peaked and are in fact falling. It is difficult to tell where the new equilibrium price will be, but it is likely in the $100 per barrel range. That will mean an average gas price of about $4 per gallon.
The future price of oil is based mostly on purchasers’ expectations. Often there is an overreaction when significant world events occur. Mostly because it is nearly impossible to determine how geo-political events will affect the overall oil market, a buying frenzy can occur.
Simple supply and demand conditions would not warrant an oil price of $130 per barrel. But oil purchasers feared the worst when Biden and his European counterparts announced they would not purchase any Russian oil. Russia accounts for about 8% of the total world market supply. That potential supply reduction would push prices up significantly.
A Russia-China Alliance
Russia may have found other ways to sell their oil, mostly going through China, so that the reduction in worldwide supply is much smaller. As a result, the price has fallen back to $100 per barrel.
That’s great news for consumers. Unfortunately, the inflation rate will not fall. Energy prices are only a part of consumer spending. The underlining causes of the current inflation are still present. Wage inflation, for instance, is likely to worsen this year because labor will seek higher wage increases to offset the record high inflation.
Organized labor will seek very large wage increases this year, perhaps as high as 10%. They will argue that since inflation is now almost 8%, they will need a 10% raise just to stay ahead. That means labor costs will increase for business who will then have to raise their prices to maintain profit margins. That leads to a wage-price spiral that is very difficult to end.
Additionally, and despite what Biden may say, increasing government spending that leads to higher budget deficits is purely inflationary. Biden will not reduce government deficit spending but instead is trying to increase it further.
Fed Finally Stepping Up
The shockingly irresponsible Federal Reserve is now poised to become more responsible. By Wednesday the Fed will announce that their bond-buying program has ended, and they are beginning to raise interest rates. They will likely act slowly and raise rates by only ¼%. They should be more aggressive and raise rates by at least ½%.
Most of the current inflation is caused by excess demand. Raising rates will reduce demand and start to reduce inflation. Since there is so much excess demand and since the Fed has kept interest rates near zero for so long, their expansionary monetary policy is the cause of most of the inflation.
While oil and gas prices are falling and will soon level, overall inflation will not fall anytime soon. It is up to the Fed to act, but currently, they are moving way too slowly.
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