What could complicate the U.S. Federal Reserve's job to boost the economy? The price of oil. That's correct: the price of crude -- the world's most important commodity.
The reason? The impact of a high price of oil on prices throughout the U.S. economy.
Currently, inflation is very low, and wage inflation is nonexistent, due to slack labor markets, the Fed said in the minutes of its most recent meeting in September. Hence, don't look for wage pressure to move the inflation needle anytime soon.
However, oil could present a problem. Due to its importance in the U.S. economy, higher oil costs could force businesses to raise prices to avoid having their margins squeezed, leading to an uptick in inflation. And, this form of inflation is largely beyond the Fed's control. To be sure, amid competitive pressures, some companies would no-doubt eat the added cost rather than risk losing business, but companies can absorb higher costs only up to a point. Eventually, prices would have to rise to protect profits.
Oil closed Wednesday up $1.03 to $75.31 per barrel on continued optimism that both the U.S. and global economic recoveries are gaining steam, which would increase demand for crude.
Economic Analysis: The above again highlights both the need for increased energy conservation and a balanced federal budget in the U.S. Each would take pressure off oil prices: the former, by reducing oil consumption; the latter, by strengthening the dollar.
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Reader Comments (Page 1 of 1)
10-15-2009 @ 1:36PM
Iridium said...
A Big Mac meal went from $3.80 two years ago to $5.35 now.
Wendy's $.99 items went up to $1.59
Arby's combos are now $5.01 instead of the $4.25 average before.
Taco Bell plain tacos used to be $.79 and they are now $.99.
The historical average price for a gallon of gas $1.35 and now it is $2.50.
Average box of name brand cereal up to $4.59 from $3.25.
Chicken wings now cost more than chicken breasts.
REAL WORLD MASSIVE INFLATION CAUSED BY AN INCREASE IN TRANSPORTATION COSTS AND EXCESSIVE SPECULATION BY COMMODITY BROKERS.
This is what real Americans are experiencing. A massive drain on their wallets during a time of downward wage pressure. We should have deflation but instead we have inflation. How does that happen? For some reason economists think the way to fix the economy is to make everything more expensive while cutting labor costs. How does that work?