Crude oil is a major economic input so a rise in oil prices contributes to inflation which measures the overall raꦚte of price increases across the economy.

Inflation as measured by the annual gain in the U.S. 澳洲幸运5官方开奖结果体彩网:Consumer Price Index (CPI) set a 40-year high in March 2022 amid COVID-19 supply disruptions. Crude oil prices were the highest in a decade as the U.S. and its allies imposed sanctions on Russia due to its invasion of Ukraine.

Cause and Effect

澳洲幸运5官方开奖结果体彩网:Higher oil prices raise inflation indirectly because crude oil is a key i🍒ngredient in petrochemicals used to make plastic. More expensive oil will therefore tend to increase the prices of many products made with plaꦫstic.

Consumer prices also factor in transportation costs, including fuel prices. The cost of oil accounts for roughly half the retail price of gasoline.

The indirect contributions of crude oil prices to inflation are reflected in the 澳洲幸运5官方开奖结果体彩网:core CPI index which doesn't include energy o♊r food prices because they tend to be more volatile.

Federal Reserve Chair Jerome Powell said in his semiannual testimony before the U.S. Senate Banking Committee in March 2022 that every $10 per barrel increase in the price of crude oil raises inflation by 0.2% and sets back economic growth 0.1%.

A study by the Federal Reserve Bank of Dallas in September 2021 suggested that the spike would boost the annual inflation rate by three percentage points in the short term if crude oil prices rose to $100 per barrel for three months before retreating with the effect fading quickly as oil prices pulled back.

Shifting Trends

Crude oil was a bigger contributor to inflation in the 1970s when it was used much more intensively per unit of economic output. The U.S. economy consumed more than a barrel of crude per $1,000 of gross domestic product back then. That had dropped to about 0.4 barrels per $1,000 of GDP by 2019.

Reduced reliance on energy and particularly on crude oil promoted disinflation or a decline in the inflation rate.

Spot oil prices have retained a strong correlation to market measures of long-term inflation expectations, however.

Some analysts have argued that the correlation between crude's diminished importance as an economic input and a lower inflation rate may no longer hold as oil is supplemented by less climate-damaging but more expensive renewable energy sources. Global supply chains are giving way to costlier domestic or regional sourcing.

Goods Producers Pay the Price

Oil prices have historically exerted more influence on the 澳洲幸运5官方开奖结果体彩网:Producer Price Index (PPI) than the CPI. The PPI꧂ measures the prices of goods at the wholesale level. The CPI measures the prices that consumers pay for goods and services.

The 澳洲幸运5官方开奖结果体彩网:correlation between oil prices and the PPI was 0.71 between ꦅ1970 and 2017. That's🌃 much stronger than the 0.27 correlation with the CPI, according to the Federal Reserve Bank of St. Louis.

"The weaker link between oil prices and consumer prices likely comes from the relatively higher weight of services in the U.S. consumption basket, which you’d expect to rely less on oil as a production input," according to the St. Louis Fed.

The Federal Reserve's preferred inflation measure is the personal consumption expenditures price index. It has a lower gasoline weighting than the CPI.

The Bottom Line

The price of oil has historic🤪ally correlated with inflation but that relationship has become less pronounced since the 1970s. The loosening of this correlation ꦏis likely a result of the growth of the service sector which uses energy less intensively than manufacturing.

Oil is a key input in manufacturing and a major cost factor in shipping so oil prices have tended to have a greater effect on the cost of goods than services. This also explains the relatively weak correlation between oil and CPI and the strong one between crude and PPI.