The rising oil prices this summer, more than $90 a barrel for Brent, made investors nervous. Especially since the possibility that the specter of inflation re-emerges with more force, as happened in the 1980s, began to hover on the table. severe economic crisis.
A little over a year ago, the The annual US CPI inflation rate is around 9%, the highest level in four decades. Now, hardly more than 3%. This sudden change in trend is largely due to the correction of last year’s rising energy prices.
However, the Production cuts by OPEC+ have boosted oil prices rose 20% in the past three months, with Brent crude oil back above $90 a barrel for the first time since November 2022. This is in contrast to last summer, when recession fears sent the prices tumbling 20% at the same time.
The question is whether companies will largely absorb the increase in energy costs. According to George Brown economist Schroders Many unexpected refinery outages “contribute to fuel price hikes” as do road travel times “Because of the summer holidays it’s at its peak.”
But what does the rise in oil prices mean for the underlying CPI? The expert indicated that, although energy is not directly included, oil is an “important raw material for the production of goods and services.” In his opinion, it can be considered, for example, in omnipresence of plastic, which is 90% produced from fossil sources.
“Therefore, An increase in oil prices affects core inflation. And since basic goods and services represent approximately 80% of the CPI basket, it is important to quantify their possible impact,” said Schroders expert in the same line.
As if nothing official figures on the raw materials component of the underlying CPI, we used Goldman Sachs estimates. Goldman Sachs uses national accounts input-output tables along with the PCE indicator provided by the Bureau of Economic Analysis, before comparing the PCE categories to their CPI equivalents.
Their analysis suggests that energy costs represent 15.9% of some categories. Of course, together they represent only 1.7% of the total underlying CPI. Why so low? “Partly because rents represent a very important part in the price basket, but even if they are not included, the difference is small”, highlights Goldman Sachs in his report.
“Instead, this is mainly because the prices charged by producers are diluted by wholesale and retail margins, which are often may represent half or more of the prices paid by consumers.”, Add. However, margins are sometimes used to absorb higher energy costs. Goldman estimates that companies passed on 45% of raises before the pandemic, but this figure rises to 60% when data from 2020 is included.
They attributed the rebound in impact rate due to low competitive pressure among imbalances between supply and demand and the reduced willingness to absorb oil price increases due to widespread cost pressures. After considering these factors, they estimate that the transfer rate will be on the same line before 2020 (that is, 45%).
“Throughout, We can assume about half of a 20% increase in oil prices In the last three months it will be passed on to consumers. And, since energy prices represent 1.7% of the core CPI, this suggests that the The overall inflationary effect will be less than 0.2 percentage points. Since it’s been spread over several months, it shouldn’t be very noticeable,” Brown added.
But the impact of headline inflation should be more modest than it used to be. This can be because the energy intensity of the economy, which is calculated as the total consumption of energy divided by GDP, has declined significantly in recent decades. Last year it was almost 60% below the level during the 1979 energy crisis.
This is for two reasons. First of all, the relative efficiency of buildings, vehicles and industrial processes developed over the decades. Technological advances play a role in this area, but so do regulatory initiatives.
For example, the CAFE standards (The Corporate Average Fuel Economy) in the United States ensures that the miles per gallon of new cars has increased by 32% since 2004. And this is despite the fact that the power of the car has increased by 20% and weight by 4% in the same period.
Second, the service sector represents a largest part of the economy after the transfer of sectors of high consumption energy in countries like China and Mexico. Oregon and Washington states have seen a 50% reduction in energy consumption over the past two decades. This happened after the transition of their economies from energy-intensive industries, such as FORESTS and the agriculture to less intensive sectors such as electronically and information technology.