Why $200 Oil Won’t Spike Inflation to 9% | Anna Wong on Recession Probability, PCE vs CPI, and Fed Reaction Function In A Scenario of Soaring Energy Prices
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Today's episode is brought to you by Pictet Asset Management and their AI enhanced ETF range, ticker PQNT and PQUS. You'll hear more about how they're using AI to enhance equity exposure later in the show. For now, let's get into it. Very pleased to be joined today by Anna Wong, chief US economist at Bloomberg. Anna, welcome back to Monetary Matters.
Hi, Jack. Happy to be here.
Anna, as we record right now, the price of oil well above a $100 on Brent, flirting there at WTI, and the surging price of oil has a lot of folks concerned that inflation is going to return and return with the storm. Could it go as high as seven or eight or even 9% as it did in 2022, maybe even higher? You have a view that is challenging challenging this. Tell us your findings, your analysis on this.
So you just go by the oil's futures curve, which is what many economists would use for their baseline view. I mean, though I personally would not use it, but many economists and including those in central bank, their starting point is an oil futures curve. That curve is very optimistic. It's seeing that oil price will quickly decline back to around 80 ish in the second half of this year and then 70 ish through 2027. That means that CPI, headline CPI probably would peak around mid year this year, in the next couple of months, in fact, at roughly almost around four, given the oil's futures curve
What's a hard story to tell?
That second round. The fact to push it from like, even assuming oil price goes to $200 per barrel and stay there, which is already a difficult story to tell. You also have an additional second round that's on par with the size of the first round inflation effect. Because then that kind of story would involve a lot of cost push inflation pass through. And in the past, to have significant cost push pass through, you need to tell a story of inflation expectations being unanchored. Okay. So that's the first hard story to tell. And we have seen five year five year inflation break even have actually
So in in 2022, let's look at WTI oil peaked on a closing peak at a $123 inflation got as high, looking at CPI, at as 9%. And you're saying that there there was enough money in the system to absorb those higher costs. Everyone hated it. Gas was a lot higher, but people still had a job, and they had enough money to keep on spending. Now you're saying that they don't, and the quote unquote good consequence of that is that inflation won't get as high, but it sounds like an implication of your point is that it's going to go through demand destruction. There's just not enough money in the system. Pe
I agree with you that it and that's what I'm saying, demand destruction. And one key micro data I would be paying attention to is services data. So back in 2022, all of us who are looking at the CPI were saying, well, the services are very strong. Recreational services, people are going on the Taylor Swift thing is 2023, but people are probably already buying tickets for our Taylor Swift tickets. And whereas today, we could see the services, the recreational CPI items are actually quite volatile. So say, take hotels. We're gonna get March CPI next week, and that will be the highest CPI monthly
So people might see your claim that inflation won't go as high as 2022, even with far higher oil prices, as a good thing. But it is a little bit more complicated than that because, as you said, the savings are tapped, the incomes are tapped, and demand destruction is going to occur. The way that inflation is lower is that demand destruction is going to occur.
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