That’s Oil Folks

The recent slight drop in inflation caused a wave of optimism that we are out of the woods. All markets rallied and the Fed decided to slow down the pace of raising interest rates.

But, let’s take a closer look at the constituent parts of inflation, shall we? The following chart from the WSJ tells it as it truly is: the drop in inflation came 100% from lower energy prices. Core inflation remains mostly unchanged and high, and so does the food component.

To make this clear, here is another chart: energy price inflation came down from 42% yoy - the highest in 40 years - to a more manageable 17.5%.

And why did energy prices come down in the US? Because the government released an unprecedented amount of oil from the Strategic Petroleum Reserve, increasing local availability of cheaper oil to domestic refiners thus lowering gasoline prices from $5.00 to $3.60 per gallon. Gasoline is the largest component of energy CPI thus… lower overall inflation.

This unprecedented drawdown in the SPR is not sustainable, of course. If continued at October’s rate, America’s strategic reserves would empty completely in a mere 17 months. In fact, there are signs that the drawdown is slowing down in November - after the midterm elections, of course. Now, if I were of a suspicious nature I would say that lowering gas prices and inflation was a political ploy designed to shore up the Democrat’s showing in the midterms. 

One way or another, we will soon be back to normal (whatever that is), the oil drawdowns will cease and the SPR will need to be filled up again, reversing the downward pressure to an upward one.

As Porky used to say - almost - “That’s Oil Folks!”