Lower Energy Prices Could Be Inflationary
Photo by Alex Wong / Getty Images
I read a short article Friday morning about when the Federal Reserve might increase interest rates. One money manager interviewed argued that the drop in oil prices means that the Fed will raise rates later than initially thought. This argument is based on the notion that lower oil prices are deflationary and that the Fed won’t raise rates until it sees evidence of inflation.
This kind of thinking makes sense on the surface, but it could be off base. When oil prices were rising, the Fed and a number of economists said we should ignore headline inflation and focus instead on core inflation. For those who don’t know, core inflation is the rate of inflation if you exclude food and energy. The reason economists study core inflation is because food and energy prices are notoriously volatile. As a result, it makes sense to examine both core and headline inflation.
However, if the Fed focuses only on core inflation when energy prices are falling, it could miss inflation in other kinds of goods and services. While the Fed will monitor both inflation figures, it will likely pay more attention to headline inflation in a falling energy price environment. The Fed does not want to fall behind the curve.
Furthermore, lower energy prices could actually be inflationary rather than deflationary. This is because lower energy prices should generate more economic activity. Demand for all kinds of goods and services could rise when energy prices are low. As a result, businesses are more likely to expand and hire more people. This increased economic activity caused by lower energy prices could produce higher, rather than lower, headline inflation. That alone could prompt the Fed to stick to its plan to raise rates. At this point I continue to expect the Fed to increase the fed funds rates during the first half of this year.
Read Vahan’s blog at Janjig.com.
Vahan Janjigian is Chief Investment Officer at Greenwich Wealth Management, LLC, a SEC Registered Investment Adviser, where he manages portfolios for clients in separate accounts. Dr. Janjigian is a former Forbes magazine columnist and former Editor of the Forbes Special Situation Survey. According to Hulbert Interactive, his stock picks returned more than 18% annually during one of the market’s worst 10-year periods.
Dr. Janjigian holds the Chartered Financial Analyst designation and has earned degrees in general sciences and finance from Villanova University and Virginia Polytechnic Institute and State University (Virginia Tech). He previously served on the faculties of several universities, including the University of Delaware, Northeastern University, the American University of Armenia, and Boston College, where he taught courses in corporate finance, financial theory, investments, accounting, and economics; and he currently teaches a seminar on equity investment management to business executives in Singapore through Baruch College’s Zicklin School of Business. Dr. Janjigian has served as an expert witness on matters involving portfolio management, churning, suitability, and hedge fund manager compensation.
Dr. Janjigian has published his research in numerous scholarly and professional journals; and has been quoted in many leading newspapers and magazines, including Barron’s, Forbes, The Wall Street Journal, and USA Today. He appears as a guest commentator on various television and radio networks, including Fox, CNBC, MSNBC, and CBS Radio. Dr. Janjigian is the author of Even Buffett Isn’t Perfect (published by Penguin) and co-author of The Forbes/CFA Institute Investment Course (published by Wiley).
Trending Now on Affluent Christian Investor
Sorry. No data so far.
Follow Us
The Affluent Mix
The Era Of No Consequences January 14, 2021 | Frank Vernuccio
Income And Well-Being January 14, 2021 | Jim Huntzinger
How Companies Pay Shareholders: Buybacks Don’t Subtract From Wages... January 14, 2021 | Jerry Bowyer
Taper Nervous Breakdown January 14, 2021 | Michael Pento
China, Democrats, And Donald Trump January 8, 2021 | Frank Vernuccio
Biochemical Engineer Ivor Cummins Discussing “The Rosetta Stone Of Modern ... January 7, 2021 | Jerry Bowyer
Hillbilly Elegy Economics Lesson: Culture Matters... January 7, 2021 | Roger McKinney
Take The Under On 2021 GDP January 7, 2021 | Michael Pento
How Companies Pay Shareholders: Buybacks Are Not A Giveaway... January 7, 2021 | Jerry Bowyer
The History Of Income Inequality And Popping Economic Bubbles... January 7, 2021 | Jim Huntzinger
Diseases Of Modernity: What Do They Have In Common?... December 22, 2020 | Jerry Bowyer
Mobocracy December 22, 2020 | Frank Vernuccio
Beware Market Land Mines: Stimulus, Vaccine Failure, Interest Rates... December 22, 2020 | Michael Pento
Following Classical Economics December 22, 2020 | Jim Huntzinger
What Prostate Cancer Taught Me About Our Fiscal And Physical Health Code Blue... December 22, 2020 | Kevin Cullis
The War Of The Worlds December 22, 2020 | Terry Applegate
Cuomo’s Partisan Authoritarianism Struck Down By SCOTUS... December 15, 2020 | Frank Vernuccio
Socialism: The Road-To-Hell Paving Company... December 15, 2020 | Roger McKinney
Amazon And The Los Angeles Lakers Wreck The Wage-Stagnation Narrative... December 15, 2020 | John Tamny
Capital Abounds, And It Needs A Place To Go... December 15, 2020 | David Bahnsen
How Companies Pay Shareholders: Buybacks Are Not A Giveaway... December 15, 2020 | Jerry Bowyer
Signs That Biden Will Be Soft On Iran December 10, 2020 | Frank Vernuccio
Join the conversation!
We have no tolerance for comments containing violence, racism, vulgarity, profanity, all caps, or discourteous behavior. Thank you for partnering with us to maintain a courteous and useful public environment where we can engage in reasonable discourse.