Oil prices appear to have peaked, helping suppress inflation

Oil is looking as though it might have peaked. Markets always overshoot when looking for new price levels, be that to the upside or the downside, and when the WTI – the West Texas Intermediate crude benchmark –  on Friday reached US$ 87.51 pbb, its highest price since November 2022, it might have done just that. 

At the time of writing, the WTI is at US$ 86.99 and probably set to go lower as the day and the week progresses. I’m sure there will be some clever chaps or chapettes who will associate the softer price of the black stuff with something that was said by someone at the G20 – Brent is still north of US$ 90.00 – but from where I am sitting it looks far more as if the point has been reached where fear meets greed. The oil producers won’t be worried about the sharp day to day movements and will no doubt be happy for WTI to settle at or around US$ 85.00.

This oil price thing will be reflected in the August US CPI number which is due out on Wednesday. Consensus is for a slightly higher month over month figure, which with the higher hydrocarbon prices is only to be expected. Fed Chairman Jay Powell has already let it be known that two consecutive months of falling inflation is far from enough to satisfy him that the beast has been slain although I suspect one would do well to look a little further.

The majority of this ongoing inflationary wave has been cost-push inflation. It has come from the supply side, and this is the cause of the much vaunted cost of living crisis. That might well have been waning. I say waning because the decrease in energy prices has done much to bring headline inflation lower. But as energy is reversing its downward trend, so the falling trend in inflation will also be getting stuck. That is in pretty much every forecast.

The great unknown, however, is how demand side inflation will behave. Wages have been playing catch-up but are still a long way from satisfying most employees and their unions that the past standard of living has been re-established. I find it hard to believe that in this age of entitlement workers will take cuts in their real incomes sitting down and that therefore the potential for a longer period of inflation, albeit from the demand side, is on the cards. Core CPI – that’s excluding the volatile elements of food and energy – is expected to flash up at 4.2%. We shall have to wait and see although the smoke signals rising from the Fed’s headquarters in Washington are interpreted that the US central bank will remain on hold at its impending monetary policy meeting which is scheduled for next week.

Meanwhile the Bank of England and the ECB are both dancing around their handbags. Their respective economies are certainly weaker than their American counterpart while inflation is in both areas more persistent. Their significantly stronger social security and state monopolised healthcare networks make inflation fighting not only more difficult but also politically far more sensitive. My guess is that they’d both instinctively like to tighten but are in equal measure doing all they can not to scare the horses.

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