President Donald Trump tells reporters he loves inflation
Asked if he was concerned about the latest inflation numbers, President Donald Trump told reporters he loves inflation.
With the United States and Iran agreeing to a framework agreement to end months of war and reopen the Strait of Hormuz, one thing is certain. That means the cost of living crisis has become just a little less serious.
However, how much the reduction will be and how long it will last remains an open question, especially considering the details of the deal are unclear.
“How many times have we talked about a ceasefire? We’ve been here before, and we’ve seen the same reaction over and over again,” said John Mousseau, chief investment officer at Cumberland Advisors, a subsidiary of MidPenn Bancorp.
Still, for American consumers, every little bit helps.
How much will gas prices fall?
On June 15, the national average gasoline price fell below $4 a gallon for the first time since mid-April, albeit at just $3.99, according to metrics compiled by GasBuddy. Brent crude oil, the world standard, was trading at about $82.61 per barrel, the lowest price since early March.
“At this point, unless there is a dramatic reversal and the US and Iran continue to move in a positive direction, the national average could continue to decline,” said Patrick de Haan, head of oil analysis at Gasbuddy.
Still, he cautioned that there is little reason to believe this price easing will continue until the Strait reopens and oil flows begin to move normally.
Analysts at Oxford Economics agreed, writing in a research note published early June 15: “The US-Iran deal is an important step towards reaching a full-fledged agreement. However, there are likely to be bumps in the road, and it will still be some time before shipping in the Strait of Hormuz approaches pre-war levels.”
Is the Iran peace deal good for the US economy?
The money freed up from lower pump costs should help support the overall economy.
“Every $0.10 in gasoline prices increases spending on gasoline by about $12.3 billion, equivalent to about 0.06% of consumer spending that cannot be spent on other goods and services,” the University of Oxford wrote in March.
Beyond the prices of the specific things households need, an end to hostilities is also likely to mean a decline in broader measures of inflation.
The consumer price index compiled by the Labor Department has risen sharply since the start of the war. The annual inflation rate was stable at 2.4% in February before the conflict began. It rose to 3.3% in March and rose again to 3.8% in April as supply chain disruptions and higher fuel prices raised the cost of producing other goods.
Ben Shoesmith, senior economist at KPMG Economics, said in a note published June 15 that it will take “several quarters” for global supply chains to return to normal, so price pressures will remain high “for some time.”
What does the end of the war mean for the Fed?
Inflation indicators are important because the Federal Reserve looks at changes in overall prices when determining interest rate policy. Many economists believe the easing announced this week may help policymakers make the case for keeping interest rates on hold. The Fed is scheduled to announce its next interest rate decision on June 17th.
“It’s still possible that these inflation concerns prove to be temporary,” said Don Rismiller, chief economist at Strategas. “At the very least, the recent drop in oil prices should buy central bankers time to find out.”
However, the Fed is not the only market force that determines the direction of interest rates.
Investors in U.S. Treasuries also hold many cards. Since the war began, these investors have made clear that they expect inflation to rise, which will erode the value of the income that bonds provide. When investors sell bonds, the yield (interest rate) increases. The flip side of this is that bond issuers have to pay higher yields, or interest rates, to entice investors to buy.
So far, bond investors have not reacted to the announcement of the peace deal as much as the oil market. The 10-year soared to 4.671% in early May and has been falling choppyly since then. However, it has remained roughly flat since the deal was announced over the weekend.
“The bond market needs more convincing that inflation will not be baked into the economy,” Mousseau told USA TODAY.
There are several effects of rising government bond yields. Among them, US 10-year bonds are also attracting attention as mortgage interest rates remain high. But more simply, when the government has to spend more to finance its operations, especially when war spending increases and tax cuts reduce revenue, the budget has less room to include other items such as health care and social security.
