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After Headlining January Inflation Oil Prices Fall

March 22, 2017

Inflation increased in January largely due to a 100% year-over-year increase in oil prices. The price per barrel of oil bottomed at $26 in January 2016 but by the same month in 2017 had rebounded to an average of $54. The result was an increase in energy prices and strong sales growth for gasoline retailers.

However, the price of oil has fallen sharply in March. After starting the month at $54 per barrel the price of West Texas Intermediate Crude Oil, a major US benchmark price, has declined to $47. This is a 13% decline in just nine trading days.

The decline in oil prices will likely have several implications. The first is it will likely reduce the upward pressure on inflation as the year-over-year price comparisons will be much lower by the time the March 2017 inflation numbers are reported. Second, the growth rate of retail sales may also decline as less money is spent at the pump, freeing up money to pay down household debt. Finally, the decline in oil prices has hit energy stocks, which have declined 5% since March 1st.  

The decline in oil prices may be welcome news for consumers but could also be a sign that the real economy is slowing, causing oil demand to decline.