Even ‘big wigs’ reason from a price change!

From Vice Chair Stanley Fischer:

“I’m not very worried,” Fischer told an audience at the Council on Foreign Relations. “The lower inflation that we’ll get from the lower price of oil is going to be temporary.”

He also said lower oil prices were “a phenomenon that’s making everybody better off.”

Interestingly, in 2007-08 when oil prices rose FOMC discussions showed they were very worried that would have a permanent effect on inflation expectations. But a drop in prices is seen as having only a temporary effect!

The part of the fall in prices due to increased supply is “positive”. The part due to a fall in demand is the outcome of something “negative”, i.e. “everybody being worse off”.  How can the consequence of being “worse off” make you “better off”?

Update 12/14/14: Jim Hamilton quantifies the higher supply/lower demand effects:

West Texas Intermediate sold for $105 a barrel at the start of July, but ended last week at $58. The most important factor has been surging U.S. production. But another reason oil prices have slid so much is weakness in demand for the product, which may be related to a slowdown of overall world economic growth. Here I comment on the importance of that second factor.

And concludes:

In other words, of the observed 45% decline in the price of oil, 19 percentage points– more than 2/5– might be reflecting new indications of weakness in the global economy.

2 thoughts on “Even ‘big wigs’ reason from a price change!

  1. In the ‘old’ days, just a whiff of geopolitical tensions concerning an oil-producing country and the price of oil would rise. Now we have problems in Libya, in Venezuela, in Russia and general instability in the Middle East… Through all of that the price plummets? It’s true that the US has a shale boom going on, but I’ve read it isn’t producing that much compared to the mature pertro-states. I can only imagine how bad the demand problem must be for the price to sink so far in the midst of everything going on in the world.

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