Weak Oil Prices Should Bolster U.S. Growth...

An apparent anomaly is gladdening forecasters' hearts. Just as the U.S. economy shows signs of accelerating, oil prices have taken a dramatic slide. At last count, benchmark crude prices had slumped to $14 to $15 a barrel, a five-year low. The economic fallout for the U.S. is lower inflation and faster growth ahead.

The latest slide has convinced many observers that oil prices are likely to stay low for another year or so, and perhaps longer. Demand in much of the world remains depressed, with scant sign that major industrial economies overseas are close to turning up. Oil stocks are high, and exports from the North Sea and Russia are strong. Most important, in the face of weak prices and a growing risk that Iraq will resume oil exports, OPEC seems unable to agree on new production quotas.

Economists at DRI/McGraw-Hill believe crude prices over the next two years will average $16 to $17 a barrel, about $2.40 less than they were predicting just a month ago. Economist Irene King of Morgan Guaranty Trust Co. warns, however, that oil prices could fall close to $12 a barrel for a while if Iraq resumes exports.

The impact of low oil prices on the U.S. economy, says economist Bruce Steinberg of Merrill Lynch & Co., should be evident in the inflation indexes over the next few months, with the consumer price index rising by about four-tenths of a percentage point less than it would without the price drop. This could well blunt an anticipated seasonal uptick in inflation early next year.

Looking farther out, DRI/McGraw-Hill predicts that annual inflation will be reduced by two-tenths of a percentage point in the next two years under its latest oil price scenario. If prices stay close to $15 per barrel, it adds, growth would pick up even more steam, and inflation would be cut by an additional one-tenth of a percentage point.