“The politically relevant part of inflation is almost the exact opposite of the economically relevant part the Fed is focusing on,” said Jason Furman, a professor at the Harvard Kennedy School and a senior official in the Obama administration. “People care about the prices they pay, and especially the prices they pay most frequently and most transparently, which are gasoline and food.”
The White House has already started to profit from the significant drop in crude oil prices that began in late October, triggered by a global spike in production and fears over the Omicron variant of the coronavirus that could dampen travel demand. The administration also cited its own decision to release 50 million barrels of oil from U.S. reserves.
“Gas prices have come down somewhat,” said Ron Klain, White House chief of staff tweeted wednesday. “They should go down more …”
The US Energy Information Administration forecast this week that gasoline prices will fall to an average of $ 2.88 per gallon next year, from $ 3.39 in November.
Yet Americans are increasingly worried about inflation, with 56% saying it causes them financial hardship and more than half citing the costs of food and gasoline, poll finds. of the Wall Street Journal this week.
Republicans have used this concern so relentlessly to criticize Biden’s heavy spending plans – Florida Senator Rick Scott called the issue a “gold mine” for the party – that White House Press Secretary Jen Psaki, accused them of “chasing inflation”.
“Look at what inflation does: it doesn’t hurt the rich, it hurts the poorest families when they have trouble filling their cars, putting food on the table, affording a house”, Scott said on Fox News this week.
The most important factor that could prove Republicans right on headline inflation would be another surge in energy prices in the spring and summer of next year that exceeds the levels of recent months.
But oil prices have likely peaked, barring unforeseen shocks, said Al Salazar, vice president of intelligence at energy analysis firm Enverus. The Organization of the Petroleum Exporting Countries is ramping up production, which will put downward pressure on prices, and major economies are turning to other sources of energy to cover their heating costs for the winter, which could also be hotter than expected.
“We have all of this supply online and the demand is weakening seasonally, and then we have Omicron on top of that,” said Salazar. “We will probably have restrictions, in terms of movement, and that leads to a natural surplus.”
In the second half of next year, prices might pick up a bit, but “I really don’t think you will have high prices” given the expected supply, including from US oil producers, said. he added.
Crude oil was trading at around $ 72 a barrel mid-week, down from its peak of $ 84 in late October, but still above the price of $ 59 in December 2019 before the pandemic began.
Salazar said he expects prices for next year to hover between $ 70 and $ 60, which will ultimately translate into lower gas costs; the prices at the pump are not lower than the crude by a month or two.
Increased production globally could also lower the prices of key crops such as corn and wheat. The United States is a major food exporter, so the more other countries produce – or the more supply chain delays keep perishable goods in the domestic market – the more commodity prices fall.
“We had our highest prices in May, June, July of this year,” said Chad Hart, agricultural economist at Iowa State University. “On the crop side, even if I look at the cattle side, we see the prices going down there. “
Corn, for example, was trading around $ 5.85 a bushel midweek, down from a high of $ 7.72 in May, although still much higher than the price of $ 3.66 before the pandemic . But the markets are betting that this downward trend will continue over the next two years.
The relief from these constant declines may not be so dramatic for consumers. “Food prices are sticky, so they like to go up, but they hate to go down, whereas commodity prices can move very quickly in either direction,” Hart said. He added that food prices also include the costs of packaging and storage until shipping and marketing.
But lower crop prices could prevent grocery store prices from rising significantly next year compared to the sharp increases this year, he said.
One looming question, especially for the Fed, is to what extent price spikes in other sectors of the economy will continue. Rent, the biggest monthly expense for most tenants, has started to drive headline inflation up, and this dynamic is expected to persist for years to come. Meanwhile, central bank officials also see companies more emboldened to raise prices, reporting anecdotes where “strong demand has generally allowed companies to raise prices with little hindsight.”
Still, a drop in commodity prices in all areas – from steel to cotton – could help lower headline inflation readings, as they are essential for many commodities.
Skanda Amarnath, executive director of worker advocacy group Employ America, said the trend could also suggest other reasons to be bullish on the price outlook, if it indicates that supply chain issues are starting to emerge. to resolve.
“Next year we will be more mature in the recovery with less of the budgetary boost,” he said. “Growth will be slower next year, and at the same time, you see that there is some pretty tangible evidence that production capacity, especially in Asia, is likely to improve. The signals you receive from commodity prices seem consistent with the healing story. “