Fed Researchers See Oil Curb on Inflation Offset by Other Prices

Federal Reserve Bank of Cleveland researchers say falling oil prices mostly affect inflation through retail gasoline costs and producer prices, which means savings at the gas pump can help lift prices for other products.

“As consumers use savings from lower energy prices for other goods and services, these prices are likely to rise in response, offsetting the initial dis-inflationary impact of lower oil prices,” reserve bank researchers Ben Craig and Sara Millington wrote in a report published today.

Fed officials are watching for signs that lower energy prices don’t pull down inflation expectations, which could herald a more general price decline. Such deflation damages growth by encouraging households to delay spending in anticipation that prices will fall further in the future.

The researchers said their models show “core indicators remain steady” while declining oil prices depress estimates for broader gauges, such as the consumer price index and the personal consumption expenditures price index, which include volatile energy and food costs.

Inflation as measured by the broader PCE index, the Fed’s preferred gauge, rose 1.4 percent in September and hasn’t exceeded the central bank’s 2 percent target since March 2012.

West Texas Intermediate, the North American crude benchmark, settled at $74.58 today and has lost almost a third its value since touching a $107.73 high in June.

Inflation over the longer run is “primarily determined by monetary policy” rather than swings in the individual price components in indexes, Craig and Millington wrote.

Before it's here, it's on the Bloomberg Terminal.