When younger folks at the bank (which means almost everyone that I work with) complain about inflation and interest rates, I become a curmudgeon. When I was starting out, I tell them, both quantities were well into the double digits and the phrase “soft landing” hadn’t entered our vocabulary. I close my diatribe by suggesting that their present discomfort is nothing compared to what we old-timers endured way back when.
In recent weeks, I have also overheard partners worrying about the rising cost of energy. I am tempted to cut them off with tales of oil prices rising by ten times during the 1970s, hollowing out American heavy industry and producing a series of painful recessions. But I do have to acknowledge that the recent reversal in energy markets comes at an uncomfortable time. Then, as now, we are struggling with the question of how best to power the economy and how monetary policy should react to supply shocks.
Inflation in the United States, as measured by the year over year change in the consumer price index (CPI), fell by two-thirds between June 2022 and June 2023. The main driver of the decline was energy prices; a barrel of crude oil cost $120 in the summer of last year; twelve months later, it cost $70. Broad measures of energy costs, which include electricity and natural gas, were down by 17% during that interval.
Weakness in global manufacturing was the main driver behind the decline in oil prices. Across countries, purchasing manager’s indexes covering heavy industry are in recessionary territory. China was an exception for a time, as the country emerged from the pandemic. But China’s darkening economic outlook will limit its appetite for oil as we move into 2024.