Higher Oil Prices, Higher Inflation Expected in U.S.

A perfect storm of rising oil prices and limited corporate profits is leading to higher inflation expectations for 2016.  Oil prices have rebounded from their 2016 lows, rising to $38.95 a barrel on Monday morning trading. With higher oil, gas prices have already risen in the U.S., and higher prices are expected. Gas price averages have increased from their recent lows to top $2.00 per gallon, according to Gasbuddy.com, a gas price tracking company.

A perfect storm of rising oil prices and limited corporate profits is leading to higher inflation expectations for 2016.  Oil prices have rebounded from their 2016 lows, rising to $38.95 a barrel on Monday morning trading. With higher oil, gas prices have already risen in the U.S., and higher prices are expected. Gas price averages have increased from their recent lows to top $2.00 per gallon, according to Gasbuddy.com, a gas price tracking company.

Higher gas prices are likely to drive more dollar spending in the U.S., since previous savings at the pump did not translate into higher consumption—just higher savings rates. With wages rising slightly year-over-year, the American capacity to spend more on oil is higher, lifting economic growth.

However, economists do not believe this turnaround will necessarily save the oil companies already facing bankruptcies and limited credit availability. In a note to clients, Bank of America economist Michelle Meyer said rising oil defaults, while possible, will not likely trigger bigger economic problems.

While many jobs have already been lost in energy, Meyer said there are limited chances of significantly larger job losses around the corner. “As we have seen in the energy sector, a lot of these layoffs may already be happening so the incremental layoffs would presumably be less than 25K per month. This is clearly just illustrative and assumes that bankruptcies are narrow and do not spread to the broader economy,” she said in a note.

Higher Oil, Higher Inflation

The increase in oil prices is likely to cause inflation to rise significantly. In turn, giving the Federal Reserve an excuse to increase interest rates and make debt more expensive for Americans.

In a recent speech, Federal Reserve of Richmond president Jeffrey Lacker hinted that the Fed is already seeing signs of inflationary growth. “I am reasonably confident that, barring subsequent shocks, inflation will move back to the FOMC’s 2% objective over the medium term,” he said, adding that lower inflation was due to “the falling price of oil and the rising value of the dollar.”

Calling both temporary setbacks, Lacker added, “After the price of oil bottoms out, I would expect to see headline inflation move significantly higher.”

A known hawk, Lacker dissented in late 2015 and believed that an earlier interest rate hike was warranted in the United States. Federal Reserve Chairwoman Janet Yellen postponed those rate hikes, but has also recently said two more interest rate hikes are likely to occur in 2016. The timing of those hikes remains uncertain.

Oil prices continue to climb, with some analysts believing oil above $49 is likely in the next month, boosting inflation rates and causing an interest rate hike sooner rather than later.