An inventory of America’s oil addiction explains The Fed’s impotence on inflation
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Last night in New York, the news dropped with a resounding clang that overall US consumer prices in August inflated by the fastest month-over-month pace in 14 of them.
The CPI, which measures costs across a vast swathe of goods and services, rose 3.7% from a year ago, says the US Department of Labor.
Economists surveyed by Dow Jones pegged an increase of 3.6%. On a monthly basis, prices increased 0.6%, in line with expectations.
The Federal Reserve’s preferred core CPI read, which strips out both volatile food costs – and energy prices, which we can say have gone particularly askew following the recent kick in oil – rose by 0.3% on the month and 4.3% on the year.
The same bunch of Dow Jones economists forecast for rises of 0.2% and 4.3%, respectively.
Understandably, the already fraught US investors were a bit mixed up over the latest indecisive inflation indicator.
The Dow Jones Industrial Averaged just ended 70 points lower, while over on Growth Street, the Tech-Heavy Nasdaq Composite gained a cheeky 0.3%.
The mixed-up, muddled-up, shook-up world of the August CPI read has left everyone, including Lola, baffled.
Economists and Fed decision makers dig the core read as the best view of where underlying inflation is off to.
Still, with overall CPI surprising with its 0.6% jump on July, the cat is out of the bag on just how beholden major Western economies are to higher energy prices and subsequently just how much of a squeeze a Russian-Saudi-led OPEC+ can put on those governments by culling production.
It’s a pickle. In the states, toppy August oil prices meant rising gasoline costs for US drivers accounted for over half of the unexpected spike in August’s overall measurement.
UBS economist and former Fed staffer, Alan Detmeister, told the Financial Times last week that he, for one, totally expected the “fairly large” increase in the August CPI.
Entirely because of higher petrol costs.
Maybe some easing of price rises elsewhere might help offset energy-fuelled inflation, but Detmeister told the FT oil prices could “easily” return US inflation to at least 4% by next month’s read.
Without any sense of irony, WTI crude futures fell below US$89 a barrel overnight on what analysts say was a ‘surprise’ increase in US crude inventories. Someone must’ve miscounted, because crude inventories rose by 4 million barrels last week, to 420.6 million barrels, more than double what the experts had expected in another inexplicably handy Reuters poll.
How analysts can expect a 1.9 million-barrel fall when inventories rise by triple that deficit is more understandable when one looks at the map of US petroleum production and infrastructure – the Americans like their petrol, and ever since climate scientists warned they shouldn’t use too much of it, there’s been something of a magnificent boom in fossil fuelling…
The Gulf Coast is where most US Inventories end up, but the confusion of production across the US could make the entire ESG community’s eyes fall out and explode on the floor in a puff of incredulity and dashed hopes.
The latest EIA data won’t offset the terror US markets feel about the stranglehold unexpected further production by any other major oil producers might like to impose. Enemy oil-producing nations already burnt by America (literally, in many cases) from Venezuela to Iraq would very much like to compete in a continuing tightening of the market which merely equates to a money-making, US-quaking death-embrace.
OPEC projected that global oil demand would increase by 2.25 million barrels per day in 2024 and anticipated a substantial deficit of 3.3 million barrels per day in Q4 CY23.
The IEA warns that oil output cuts led by the royal family of the sometime friend, sometime assassin of US journalists Saudi Arabia, and definitely not friends in Russia, through to year-end would ‘result in a significant deficit’ emerging in the final months of 2023.
Both oil producers have agreed to extend their ‘voluntary’ production cuts through ’till Xmas at least, despite oil having already rallied 25% since June, and despite global demand hitting record highs.
This is a no-brainer. Pain at the US petrol pump provides exponentially increased pleasure in the Kremlin.
US Presidents can do all sorts of wonderful deeds, but they’ll lose their job in a heartbeat if filling the car costs too much.
And while US gasoline isn’t yet near record highs, President Joe Biden’s people will be acutely aware that the price increase under his watch so far now stands precariously at +60%. Ready to roll higher.
Russia intensely believes it is at war with the US and NATO in Ukraine.
Why anyone with unexploded eyes would think that they – themselves the target of brutal economic sanctions – would not use whatever leverage is available to turn the screws on US inflation and consequently the US economy is beyond even my profound inventories of imagination.
But here we are, caught on the hop by an OPEC which wants to make more money for less oil and a Russia which wants to run riot inside the US by whatever means are available.
Let’s hope they don’t set up some kind of militarised hacking unit which could infiltrate US social media to inflame internal US social divisions. Fingers crossed.
Meantime, the rising and delicately poised position of petrol prices has successfully complicated, if not compromised the US Federal Reserve chief J. Powell’s job to make the call on lifting interest rates which in America are still happily ensconced at near 25-year highs.
For now, markets have only slightly rejigged expectations that the US Fed will hold this month, but see the probability of a fresh rate hike in November rising to around 50/50.