Monday, December 19, 2016

Energy Inflation Is Increasing and May Place the Fed in a Policy Bind Next year

Energy Inflation is increasing:

Saudi Arabia's massive production cut in 2014 sent oil prices lower, causing a large economic boost to consumer spending.  Earlier this month, OPEC reversed course, signing a deal that cut production. This was the primary reason for the latest rally in the oil market.  According to Bloomberg, bullish oil bets are currently at a 2-year high.  

All of these factors will cause an increase in energy inflation, which may place the Fed in a policy bind.  Overall CPI is hovering around 2%: core is 2.1% while overall is 1.7%.  But as the chart above shows, energy prices are starting to accelerate, which will push overall CPI closer to the Fed's 2% target.