Breitbart Business Digest: Oil Falls for a Bad Reason

We thought we would be happier about a decline in the price of oil.

The price of oil has plunged this week. On Tuesday, both West Texas Intermediate and Brent crude closed out the day below $100 a barrel, the lowest price since before Putin’s tanks pushed into Ukraine. It is now down 27 percent from its recent high. Unfortunately, it is hard to take much comfort in the decline in the price of oil. If oil was falling because U.S. producers were ramping up drilling operations, that would be a reason to rejoice. Even if it were the increase in Saudi production, we might have reason to be glad. Instead, this week’s drop appears to be related to news that China’s economy may be slowing down due to rising coronavirus infections.

The benefit to the U.S. economy of lower oil prices may be limited. The general pattern is that gas prices rise like a rocket when oil is on the way up and fall like a feather when it is on the way down. Economists have long puzzled over this phenomenon. Why do market forces not push gas prices lower more quickly? The answer appears to be that prices are sticky to the upside. Everyone tries to avoid lowering prices for as long as they can.

Speaking of prices, the Producer Price Index was up ten percent for the second month in a row in February. This was in line with expectations, and the market took it as a kind of stealth upside surprise. It was nice not to be bushwacked by stronger than expected inflation for once. But it’s worth keeping in mind that this is because we have just adjusted expectations to very high inflation. A year ago, the idea that we would be running at ten percent on the Producer Price Index would have gotten you laughed out of any economic conference.

The Fed will announce that it is raising interest rates by a quarter of a percentage point on Wednesday. But the real action will be in the hints about the subsequent meetings. It is clear that a quarter of a point raise at each of the seven meetings remaining this year will not stem inflation. So will the Fed signal that it will raise fifty basis points at the next meeting? That’s what everyone will tune in to Jerome Powell to hear tomorrow.