Last year, shortly after the World Health Organization (WHO) declared the new crown virus a pandemic, governments of various countries introduced large-scale monetary and fiscal stimulus to prevent the economic impact of the pandemic. The U.S. federal government has taken a series of extensive measures, injecting about $4 trillion into the economy, including direct cash distribution to households, increasing unemployment benefits, and setting up several new grants and loan programs for companies.
Driven by rising consumer demand, supply chain restrictions, and soaring commodity prices, U.S. inflation has soared rapidly and has remained high. The consumer price index (CPI) rose 5.4% year-on-year in August, the largest increase since July 2008.
There is a causal relationship between oil prices and inflation. As oil prices rise, inflation tends to move in the same direction. On the other hand, inflation tends to fall as oil prices fall. This is the case, because oil is the main input to the economy, and if the cost of inputs rises, so should the cost of the final product.
Recently, President Biden of the United States tried to calm people’s concerns that rising inflation may harm the United States’ economic recovery and undermine his US$4 trillion spending plan. Prior to this, although the economy continued to recover after the new crown epidemic-related blockade, US inflation still rose sharply.
The main reason for the increase in inflation is that the demand for goods and services exceeds the company’s ability to keep up with supply-side bottlenecks that hinder various industries, including the semiconductor and solar industries.
The US government may feel a little nervous about high oil prices, not only because of the historical role that oil has played in determining inflation trends, but also because oil prices pose a risk to the future political landscape. As we all know, the price of natural gas has a great impact on consumer psychology.
Fortunately, the relationship between oil and inflation has been greatly weakened since the 1980s.
For example, during the 1990s and the Gulf War oil crisis, although crude oil prices doubled in six months, from about $14 to about $30, inflation remained stable. This decoupling between the two indicators became more pronounced during the oil price hike from 1999 to 2005, when the average annual nominal price of oil rose from US$16.50 to US$50, and the CPI rose to US$164.30 in January 1999. USD 196.80 in December 2005.
U.S. crude oil futures prices may stand at $180 at the end of 2022
Over the years, the price correlation between crude oil and gasoline has changed a lot, which is not conducive to consumers. Most states in the United States have raised gasoline taxes, refiners face new regulations that increase costs, and trucks that deliver natural gas to gas stations lack drivers.
The relationship between high oil prices and high inflation is not so simple. In fact, some experts even put forward a somewhat convoluted argument that high inflation and a weaker U.S. dollar will push up oil prices, not the other way around.
The US economy is heading towards hyperinflation caused by the epidemic. It took five years to solve the last quantitative easing policy problem, which has now been replicated in less than a year. With the rapid expansion of the money supply, this is just a question of when hyperinflation will hit.
Analysts said that their model currently targets US crude oil futures in the $90/barrel range, which is close to 16% higher than the current oil price.
Experts believe that in view of the government’s unrestrained release of water to stimulate the economy, the U.S. dollar may depreciate sharply. By the end of 2022, the price of U.S. crude oil futures will be pushed to over $180 per barrel.
We are not very optimistic about this ultra-optimistic prospect. The reason is simple. High oil prices are not what the Biden administration hopes for, nor are they in line with the current interests of the United States. The U.S. government will definitely require OPEC oil producing countries such as Saudi Arabia to increase production.