Oil prices are at their highest level in more than a year, a fact that doesn’t bode well for the inflation situation and could complicate the Federal Reserve’s plans.
U.S. West Texas Intermediate futures briefly reached above $95 per barrel on Thursday, the highest level since August 2022. The higher crude prices will ultimately translate into higher gas prices and ding the Fed’s effort to tame inflation.
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The national average for regular formulation gasoline is about $3.84 and prices recently reached their highest seasonal level in more than a decade. Prices usually tumble as demand from the summer travel season cools off.
While rising gas prices make filling up cars and commuting to work more expensive, the higher oil prices also translate to more expensive home heating as temperatures start to decline. That is all bad news for the Fed because higher oil and gas prices end up adding to overall inflation.
“I think the key here is that this has provided another reason for consumers not only to be irritated but also face price pressures,” Mark Hamrick, senior economic analyst at Bankrate, told the Washington Examiner.
The Fed has been trying to achieve a “soft landing” in which it drives down inflation without knocking the economy into a recession. Interest rate revisions are the main tool the central bank has to drive down prices, but the higher the rates, the greater the likelihood that the economy will take a hit. The Fed has raised interest rates 11 times over the past 1 1/2 years in an effort to achieve that goal.
Hamrick said that higher oil and gas prices are already having the knock-on effect of raising prices in other industries — for instance, by raising costs for truckers who are shipping goods across the country. Airlines also might be facing some challenges with higher fuel costs.
Fuel prices tend to move up fairly quickly and then move down more slowly. “That raises the risk that that impact can be more lasting,” Hamrick said.
Still, it is possible that prices could fall during the autumn, and that the upward pressures on inflation could prove transitory. The Fed is likely to avoid reacting to the rising energy prices unless they stick around for longer, Hamrick said.
Economic analysts at Goldman Sachs are also not too concerned about the higher oil prices quite yet. They noted that the recent price increases are relatively moderate compared to those notched during the first half of last year and expect that the current bout of higher energy prices is unlikely to cause consumer spending and gross domestic product to decline.
“[Fed Chairman Jerome] Powell reminded us at the September press conference that the Fed tends not to react to energy price shocks, and we do not expect the recent oil move to de-anchor inflation expectations and in turn force a policy response,” the analysts said in a report.
Bob McNally, president of Rapidan Energy Group, told the Washington Examiner that there are two main factors fueling the higher prices. The economy recovered solidly after the COVID-19 pandemic, and high demand in places like the U.S., India, and China has pushed prices up. At the same time, Saudi Arabia and Russia recently extended production cuts, making oil more expensive.
“In addition to just the consumers feeling the pain, and public confidence and approval goes down for the president, etc., when these prices go up — in addition to that you have an oil price spike, which if you read the broader economic discussion is sort of like this unwelcome surprise that could derail the soft landing,” McNally said.
Still, the higher oil and gas prices are hurting consumers, and thus President Joe Biden. High gas prices don’t bode well for presidential approval, especially for an incumbent heading into an election year, and Biden has already been dinged by voters for the economy, according to surveys.
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A recent NBC News poll asked voters which party does a better job handling the economy, and 49% said Republicans, while just 28% think Democrats are better. That is the largest lead for Republicans since the question was asked in the survey starting in 1991.
Additionally, a Washington Post-ABC News poll released over the weekend shows that Biden’s approval rating on handling the economy has fallen to a mere 30%, the lowest reading of his presidency so far. About 75% say that the economy is either not good or in poor shape.