(Yicai Global) Aug. 23 -- How long inflation may persist has become a focus for the market, with US consumer prices hitting a 40-year high of 9.1 percent in June amid costlier energy, food and other goods. But a recent study run by an economist at the US Federal Reserve suggested energy prices based on a popular indicator to consumers may not cause long-term inflation.
Lutz Kilian, a senior economic policy advisor at the Federal Reserve Bank of Dallas, delivered his presentation at a recent symposium held by J.P. Morgan Center for Commodities at the University of Colorado Denver. He showed that US households are more sensitive to increases in gasoline prices than to any other items, and yet gasoline prices have not been the main determinant of US inflation historically.
Kilian pointed out at the Aug. 15 symposium that there is no evidence to suggest that based on the historical data until 2020, gasoline price shocks would cause a wage-price spiral, or they would unanchor long-run inflation expectations in the US.
Other research on the supply side also provides supportive evidence for Kilian’s conclusion. Knut Are Aastveit, deputy research director at Norges Bank, showed that shale oil producers in US are responding more positively and significantly to favorable oil price signals than traditional oil producers, meaning current high oil prices would induce more shale oil production and balance the shortage.
Over the last 15 years, the US has had a massive increase in crude oil production due to the surge in shale oil output, Aastveit said the same day, adding that a key feature of fracking is that it allows for a more flexible production process compared to conventional oil wells.
The low-carbon transition may also cut oil demand. In the US, fossil energy still met 80 percent of total energy needs in 2019, but the development of better and cheaper equipment capital probably can help reduce the economy’s dependence on energy including fossil fuels, said Nida Cakır Melek, a senior economist at the Federal Reserve Bank of Kansas City.
Editor: Martyn Cartwright