Over the past few months, politicians and the mainstream media have been applauding the fact that inflation has “finally been brought under control.” The headline data certainly reflects this, as the consumer price index has fallen from a peak of 9.1% year-over-year in June 2022 to 5.0% in March:
However, this is somewhat misleading. As I have pointed out in various recent articles, including this one, a significant percentage of the improvement in the consumer price index that we have been seeing is due to energy prices declining. Over the past year, the price of West Texas Intermediate crude oil is down by 22.84%:
There are a few reasons for this, including the fact that the Biden Administration has dumped 150 million barrels from the Strategic Petroleum Reserve onto the market in a successful effort to push down the price of oil. As of today, the Administration has yet to purchase any oil to refill the reserve, despite promising to do so when the price hit $72 per barrel. Another reason for the decline in crude oil prices is that the American economy is widely expected to enter a recession sometime later this year, which typically causes oil consumption to decline.
The government publishes an alternative measure of inflation called the core consumer price index. This removes the impact of volatile energy and food prices from the core measure of inflation. As we can see here, the core consumer price index has not shown any signs of moderating:
In fact, we are seeing the core consumer price index turn back up so far this year. Thus, much of the cheerleading about the Federal Reserve’s fight against inflation being over appears to be misguided. This is particularly true since crude oil prices seem likely to increase going forward as a result of the recent production cuts by the Organization of Petroleum Exporting Countries. When we consider that all of the inflation improvements that we have seen so far this year have been the direct result of energy price declines, it seems obvious that inflation will begin to tick upward once again alongside energy prices.
Thus, the market’s optimism that the Federal Reserve will soon pause or even cut rates appears to be misguided. Despite all the signs of an impending recession that have been coming out, inflation is clearly not under control. If the Federal Reserve pauses or cuts rates, inflation will once again skyrocket even in a recession. The Federal Reserve is truly stuck between a rock and a hard place here, but it may be a good idea not to bet on a near-term rate cut.