Oil To Boost On-Year CPI Comparisons Sharply

October 28, 2009

Even when inflation first fell below zero, central bankers around the world confidently predicted a return to the black in the final months of 2009.  The factor behind this prediction lies in the extremely sharp 59% decline of crude oil prices between the September 2008 and December 2008 monthly averages.  Economists call this kind of factor a base effect, since an event well in the past is responsible for a current statistical development of wide interest.  The plunge of oil prices last autumn will be yanked out of 12-month consumer price comparisons in coming months.  By comparison, on-year changes in oil prices were more or less similar from December 2008 until September of this year as one sees in the table below.  The table below is based on monthly averages of crude oil prices.  On-year percentage changes are shown from January 2008 through September 2009.  I’ve also entered a change for the year to October 2009 using an average price of $75.35 per barrel for the month through October 28th as a proxy for the whole current month.  Finally, hypothetical changes are projected for the coming four months, November through February 2010, that assume an average cost of oil equal to the same $75.35 that has been seen so far in October.

On-Year Changes 2008 2009 2010
January +69.3% -54.5% +79.1%-f
February +60.4% -58.9% +92.3%-f
March +73.6% -54.4%  
April +75.6% -55.5%  
May +97.4% -52.9%  
June +98.3% -48.0%  
July +80.8% -52.0%  
August +61.7% -39.0%  
September +31.0% -33.0%  
October -10.1% -1.9%-e  
November -39.3% +31.6%-f  
December -54.0% +78.0%-f  

It takes a shift in on-year variations of oil prices to produce shifts in consumer price inflation.  For most of 2009, oil prices consistently were substantially below year-earlier levels, but that fact had a trivial impact on reported inflation, as the drop in oil prices ranged narrowly between 48% and 59% over eight consecutive monthsHowever, the swing in the change of oil prices from minus 52.0% in July to -1.9% this month and around plus 78% by December will boost the 12-month rate of CPI inflation substantially.

2008 ended a ten-year period of strikingly relentless upward pressure on oil prices.  Based on calendar year averages, oil prices rose 32.4% in 1999, 56.9% in 2000, 0.3% in 2002, 18.6% in 2003, 34.0% in 2004, 37.0% in 2005, 16.9% in 2006, 9.2% in 2007 and 35.8% in 2008.  A drop of 13.6% in 2001 was the only year from that period to see oil prices post a decline.  2001 was a recessionary year for several economies and, ironically, the year of the 9/11 attacks.  I invoke the claim of irony because the fallout from those attacks was one of the main forces behind the climb in energy prices and should be considered among the consequences of the war on terrorism.  An even bigger reason for elevated energy prices was the boom in global economic growth during the center of the decade.

2009 marked an abrupt reversal in the pattern of oil prices measured from a calendar year versus prior year standpoint.  The average price of oil from the beginning of 2009 through October 28th was 46.6% lower than a year earlier.  One would expect oil prices to decline sharply in a year that saw such weak global growth, but our table suggests that an upward oil price bias has returned even though global growth is likely to stay weaker than its long-term trend in 2010 and 2011.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.


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