Soaring fuel prices have been the most visible, if not most causative, manifestation of inflation.
The inflation making headlines has many causes — Federal Reserve policy, the pandemic, consumer activity, supply and shipping bottlenecks — and is more intense in some sectors of the economy than others, especially affecting homebuyers, car shoppers, and drivers at the gas pump.
High gas prices were a political threat to Democrats approaching the 2020 midterm elections. Voter behavior is influenced by the economy, and the party in power is liable to get blamed for angst at the gas pump, regardless of actual fault.
Biden and the Democrats didn’t ask for, or want, the Covid-19 Omicron. But that little bug or virus, whatever you want to call it, sent oil prices crashing. Crude dived over 13%, down more than $10 a barrel, on Friday, November 26, the day after Thanksgiving, as news of a new Covid-19 variant broke and governments began imposing travel bans. The specter of reimposed restrictions and reduced travel, leading to reduced oil demand, now hangs over crude markets.
As oil is about 60% of the pump price of gas, this should translate into roughly a 10% fall in gas prices in coming weeks. It takes several weeks for oil price changes to flow to the pumps, but drivers should see some price easing by the end of the year. See story here. At $68 a barrel, oil is still expensive relative to the depths of the pandemic, when few people were traveling and roads were empty of cars, and motorists won’t see 2020 gas prices again short of another Covid-19 crisis. That was never a reasonable hope or expectation.
But if gas prices take some pressure off consumers, that might incrementally help the Democrats. But the political effects are beside the point. For most Americans, what matters is how much inflation and for how long. In that respect, tighter Federal Reserve monetary policy, not Strategic Petroleum Reserve releases or OPEC production policy, is the cure. Conservative economist Milton Friedman, a favorite of President Reagan and his economic policy advisers, argued that inflation is always a monetary phenomenon. I don’t agree; there’s monetary inflation and real inflation (for example when more resources must be expended to extract harder-to-get oil, raising the real cost of producing the oil). But the inflation Americans are experiencing now is largely the result of a combination of pandemic disruptions and ultra-loose Federal Reserve monetary policy.
It’s time for the Federal Reserve to back off the quantitative easing and zero interest rate policies that have poured money into circulation. Many economists believe the Fed overshot in its Covid-19 response, and is taking too long to begin tightening, and will be too slow to tighten. I agree with that. Until the Fed tightens money supply, we’re going to have more inflation, simply because of more money chasing a constricted supply of goods and services. This inflation has hit the goods sector especially hard because Covid-19 forced consumers to shift spending from services to goods. Flush with cash savings from all the stimulus, and unable to travel or eat out at restaurants, consumers are trying to buy stuff that isn’t available because of closed factories, congested port facilities, and too few truck drivers.
Some of this will ease as the nation and world recover from Covid-19 and businesses and supply chains return to something closer to normal. But the Fed is deliberately letting inflation run “hotter” than normal, for its own reasons, and unless that changes Americans will need to get used to more inflation than they’ve seen in recent years. So it really is mostly about what the Fed does, or doesn’t do, and that’s also largely the case with the stock market.