Food and Energy Prices Drive Inflation

On July 18, the US Bureau of Labor Statistics reported that consumer prices were up 9.1% over the year ended June 2022. It was the largest increase in 40 years, and provided reason for the Federal Reserve to continue raising interest rates in an effort to curb demand and cool off a hot economy.

Inflation in the US is measured using the Consumer Price Index (CPI), which is a broad measure of everyday good and services. However, such a broad measure provides little insight into what is causing inflation rates to skyrocket.

When we remove food and energy from the total CPI, we can see that inflation (less food and energy) rose at an annual rate of 5.9%, whereas overall inflation (CPI) is at 9.1% as of June 1, 2022. The above chart illustrates the influence that food and energy prices can have on overall inflation.

The impact of oil prices on the CPI can be significant. From June 2014 to January 2016, oil prices fell from $114 per barrel to $29, due to an oversupply in the market, as US oil production reached 1 million barrels a day and exceeded US imports for the first time in 20 years.[i] The massive drop in oil prices caused the CPI to decline below 0%, reaching a rate of -0.23% in January 2015.

More recently, oil prices have increased dramatically: from December 2020 to June 2022, oil prices increased 123% from $47.80 to $106.77.

Due to the volatility and overall effect that oil prices have on the CPI, economists will often look at the inflation rate less food and energy to determine if inflation is occurring within the overall economy, or limited to the energy sector.

Investors will want to keep an eye on oil prices for the foreseeable future to determine what impact they may have on future inflation rates, and also the need for the Federal Reserve to continue to hike rates.

Please note that all of the material provided in these postings are informational and subject to change. Nothing provided should be used as investment advice or as a basis for any investment decisions.

[i] https://www.bls.gov/opub/btn/volume-4/pdf/the-2014-plunge-in-import-petroleum-prices-what-happened.pdf