The price of WTI crude oil has risen from a December low of $42.5 per barrel to $66.1 this week—a 56% jump in just a few months. This move was accentuated this week by the Trump administration’s removal of the waivers that had allowed oil importing nations to purchase oil from the Iranians. So far, this past quarter’s increase in crude oil has not had too much of an effect on the CPI inflation data, given the base effect of higher oil prices over a similar period in 2018, which was then followed by a large dip from October to December 2018. However, this may be about to change, following this week's shift on oil waivers, in addition to tight supply conditions related to issues from Venezuela, Nigeria, and Libya, that will seemingly not be fully offset by increases in supply from various OPEC members, the U.S., Canada, and Russia.
In the latest March CPI report, energy prices increased by 3.5% in the month, but were still down 0.4% annually. In the short term, this increase in oil prices, coupled with recent actions by the Federal Reserve and the fact that we are later in the economic cycle and already dealing with a tighter labour market and stronger demand for housing, implies that we should expect some greater upward cyclical pressure on consumer prices. For the financial markets, inflation represents one of the biggest risks out there, and it is therefore the topic of this week's Economics Weekly.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.