Martha C. White
Gasoline prices have trended lower for more than 50 straight days, giving drivers much-needed financial relief at the pump.
But no one has sipped the champagne yet. Although gasoline prices have played a significant role in the current historic inflation spurt, analysts warn that a number of factors remain that will keep overall prices from falling anytime soon.
Oil outlook remains bleak
Prices at the pump could be lower now – the average cost of a gallon of gasoline is down nearly a dollar since the peak in June – but the longer-term outlook for oil suggests low inventories that will keep high prices.
“Russia and Ukraine are a factor, but … we had tight supplies,” said Rob Haworth, senior investment strategist at US Bank Wealth Management. “We would love to see an end to the conflict in Russia and Ukraine. But I think we’re still facing a global economy that’s short on oil in the near term. »
Besides Russia’s war with Ukraine and sanctions that have disrupted its oil exports, the unwillingness – or inability, according to some oil analysts – of members of the Organization of the Petroleum Exporting Countries to significantly increase production limits the amount of additional oil reaching world markets. The oil group and its partners, known as OPEC+, announced last week a small production increase of 100,000 barrels per day for September, less than the market had expected.
Another factor is the reluctance of US producers to invest big money in extracting and, more importantly, refining fossil fuels when long-term political goals suggest diminishing returns from switching to renewables.
“There is a structural problem with the oil and gas industry and it has to do with refining capacity,” said Jeff Klearman, portfolio manager at ETF firm GraniteShares. “Oil companies, not only in the United States but around the world, have not increased their refining capacity. This continues to put pressure on gasoline prices.
Peter McNally, global head of the industries, materials and energy sector at investment firm Third Bridge, said there was “misunderstood criticism” of rising refiner profits, pointing to the investments made to convert existing refining facilities to process biofuels. “These companies are investing for the energy transition,” he said.
Housing is getting more and more expensive
Housing is a big part of an average family’s budget, and it’s also a big part of the basket of goods and services that the government uses to calculate inflation. The way the Bureau of Labor Statistics calculates the cost of housing makes it a very influential component of the consumer price index. Shelter costs include equivalent landlord rent and principal residence rent, which reflects the amount landlords and tenants pay to live in their dwelling. Housing accounts for about a third of the overall CPI and about 40% of the core CPI, which excludes food and energy prices.
“What’s important is housing,” said Sam Stovall, chief investment strategist at CFRA Research. “While we’ve seen new and existing home sales start to fall, prices haven’t gone down because there’s still more demand than supply.”
Existing home prices hit a new high of $416,000 in June, up 13.4% from a year ago. A February report from Realtor.com found that at the median, renters earning the typical household income for their area are paying nearly 30% of their income in rent, a threshold that policymakers say is “burdened by rent “.
Moreover, the double whammy of higher prices and high mortgage rates continues to make home ownership out of reach for many, with more and more families forced to stay on the sidelines as the impact of Aggressive rate hikes from the Federal Reserve drives up the cost of buying a home.
“Housing prices will likely stay high and, in a sense, keep inflation high for longer,” Stovall said.
Distorted demand and labor shortages
Since the pandemic, a surge in demand for physical goods has completely disrupted supply chains, hampering logistics and causing huge price distortions.
“Inflation is primarily caused by excess demand for too few goods,” said David Dollar, senior fellow at the Brookings Institution.
This demand has led to factory closures in China, causing cascading maritime traffic jams in Pacific ports. When the ships docked, there were not enough workers to unload the cargo or drive the trucks that would transport it first to warehouses and then to consumers.
“Overall demand for goods has increased quite dramatically, so suddenly we’ve asked our system to handle a lot more stuff,” Dollar said. The result was chaos and a sudden demand for workers – at all costs.
“The lack of truckers reflects [that] we need more workers than we actually have, and that’s solved by higher wages,” Haworth said. In June, there were more than three-quarters of a million more workers in the transportation and warehousing sectors than before the pandemic.
Salaries and raises
Economists expect wage gains, which have hovered just above 5% on an annualized basis, to moderate for the rest of the year. But employers still face a severe labor shortage, putting pressure on companies to offer competitive wages to attract and retain talent.
There were 10.7 million unfilled jobs in June, the BLS reported last week. Although down from a record high of 11.7 million in April, that still represents nearly two open positions for every unemployed American worker.
“What we don’t yet know clearly, what is the new post-pandemic normal for demand? Right now, it looks like the wage pressures are here for a while,” Haworth said.
Indeed, unlike supply chain grunts or even soaring commodity prices, the inflation creeping into wages is not easily undone. Even though companies may pay less for components or raw materials, they are unlikely to implement pay cuts, so inflation persists.
“It’s strongly correlated with wage growth. That’s not to say higher salaries are a bad thing,” Haworth said. “When people have more money, they can buy more things. But if there are not more things, the prices go up. Ultimately, this results in some price pressure on everything else. »
Recent wage gains follow fiscal and monetary policies that have contributed to a cash-flooded economy due to stimulus payments to individuals and businesses, as well as quantitative easing by the Federal Reserve.
“They pumped a ton of money into the system,” Klearman said. Like higher wages, all that cash — and too few goods to spend it — is another contributor to the price hikes consumers are experiencing on everything from cars to camping gear to cookies.
The light at the end of the tunnel?
Despite expectations that inflation is likely to hold until 2023, there is some bright spots.
Along with paying less for commuting and shopping, Stovall says high airfares could come down to earth, and supermarket shoppers could see some grocery costs drop slightly if producers or distributors don’t have to. pay as much for transport in order to put their goods on the shelves. “You might start to see some food price competition start to enter the market as the cost of transportation inputs start to come down,” he said.
As supply chain rumblings persist in some sectors – General Motors told investors on its quarterly conference call last month that it had manufactured 95,000 vehicles in the previous quarter that cannot be finished or sold because the company cannot get the parts it needs to complete them – there is a feeling that the prior period of stalemate is easing.
There have also been recent high-profile cases of retail markdowns: Walmart and Target both said they had to cut prices to unload large amounts of unsold inventory that lingered on shelves as Americans redirected their spending to services like restaurants and live events.
There is also renewed, if uncertain, hope that President Joe Biden will reverse one or more tranches of the punitive tariffs Trump has imposed on China in what experts agree is a largely failed attempt to force Beijing to buy more. US agricultural products and other key exports. .
An analysis by the Peterson Institute of International Economics estimated that over time, cutting Trump’s tariffs and other tariffs could reduce inflation by up to 1.3 percentage points, allowing the average American household save nearly $800 a year.
“Certainly it would make sense to remove the tariffs now,” Dollar said. “They’re not hitting any targets and they’re being paid for by American households.”
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