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The recent jump in oil prices need not derail the U.S. recovery.
That, at least, is the view of James Hamilton, a University of California, San Diego, economist and specialist on energy economics.
In a nutshell, his argument rests on the fact that despite the jump in gasoline prices, they’re still below where they were at their peak in 2008. This matters, because historic evidences suggests, “an oil price increase that does no more than reverse an earlier decline has a much more limited effect on the economy than if the price of oil surges to a new all-time high,” he wrote in a recent post on his Econbrowser blog.
The oil price spike through early and mid-2008 was instrumental in deepening the U.S. recession generated by the financial crisis. And the collapse in oil prices at the end of the year and early 2009 helped to ensure that the economy bottomed out.
The market seems to concur with Mr. Hamilton’s appraisal. Equities have been well supported and the VIX, the measure of market volatility and therefore a proxy for how confident investors are feeling, has tumbled.
The fly in the ointment is how gasoline prices will feed into inflation. Headline inflation will certainly rise, though the Federal Reserve will be happy to ignore this, since its focus is core prices. But with the economy picking up, gasoline prices might well start to feed through into underlying prices as well. This wouldn’t be so good because it would tie the Fed’s hands on further monetary accommodation.
There’s also the small matter of how it influences demand for motor vehicles. Americans have been buying cars again, making up for a couple of years of restraint now that the jobs background is looking better. Vehicle production, meanwhile, has been an important contributor to growth.
But much further appreciation would bring gasoline prices back to record levels at which point demand for cars and trucks could start to weaken again.
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“Don’t worry about oil prices – yet.”
When people do have to worry about oil prices, how worried should they be?
The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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