Soaring Energy Prices Raise Concerns About U.S. Inflation, Economy

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Factories and service providers need energy to increase production, but oil and natural gas supplies are tight

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Economists say higher energy prices could drive inflation in the coming months, slash consumer spending on other products and services, and ultimately slow the US recovery.

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“For consumers it’s like a tax,” said Oxford Economics economist Cathy Bosjanic of the price hike. He said consumers are likely to be squeezed, but that energy-price hikes “must be extreme and prolonged” to prevent an economic recovery. More likely, “we’ll see growth stalling more or longer before growth resumes, and we get a little bit more inflation in the meantime.”

Andreas Steno Larsson, analyst at Helsinki-based Nordea Bank ABP, is more pessimistic. He said rising energy prices this year forced him to cut his forecast for US growth next year from 3.5 percent to 1.5 percent. While he believes oil and gas prices will remain stable in the coming months, he also sees a worst-case scenario, in which they are set to rise 40% sometime next year, leaving the US and the global economy in the middle. Enough to push in a brief recession. 2022.

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Rising demand and tight supply have driven prices up. As the pandemic spreads and consumers around the world increase spending, factories and service providers are ramping up production, which requires energy. Oil supplies are tight as oil-exporting countries have decided to ramp up production in measured phases rather than open taps more widely.

Natural-gas supplies are running low after a freeze in Texas earlier this year and Hurricane Ida forced nearly all Gulf of Mexico gas production offline, along with high demand from Europe, Where inventory has declined due to warm weather, weak wind. – Electricity generation and less imports from Russia.

Coal prices have risen due to supply stagnation due to rising demand and carbon emission reduction plans.

Many analysts believe that these factors will propel the prices further in the coming months. Moody’s Analytics forecasts oil to rise to $80 to $90 a barrel early next year from $79 now and natural gas prices to rise from $5.5650 to $6.50 to $7 per million British thermal units. JPMorgan Chase & Co gives the worst-case scenario for oil for the next three years and reaches $190 a barrel in 2025. Electricity prices rose 5.2% in August from a year earlier, the biggest gain since the start of 2014, according to the Department of Labor.

Energy prices are volatile even in normal times, and especially now because of the unpredictable economic outlook and how governments and investors will respond to the supply crunch. Investors are pressuring companies to maintain high prices and profit margins by resisting rapidly increasing production.

Energy represents a large portion of the consumer budget. According to the Labor Department, in August, about 7% of consumer spending went toward energy. Historically, higher energy prices have often been preceded by recessions. Consumers cannot cut back on consumption at short notice as easily as they can with discretionary buying, so higher prices act as a tax, draining the money they have available to spend on other goods and services. it occurs.

Growth slowed sharply this summer as rising Covid-19 infections due to the delta variant prompted a new round of trade restrictions and consumer caution. The Federal Reserve Bank of Atlanta estimates that growth slowed from 6.7% annualized in the second quarter to 1.3% in the third quarter.

High prices are already fueling concerns about the economic crisis in Europe and Asia, where shortages are particularly acute. In the US, analysts say the impact should be less severe, for a number of reasons. Natural gas prices have risen little because the US is a major producer of the commodity and most of the supply remains within the country. Gas supply is not as tight as oil inventories.

Which utilities ask consumers for electricity and gas is typically decided for a year, said Kevin Book, managing director of Washington, D.C.-based research firm Clearview Energy Partners LLC.

Families have a cushion of savings from federal stimulus checks and unemployment insurance. “With savings of more than $2 trillion to American households compared to pre-pandemic levels, the US is in a better position than our European and Asian trading partners to absorb the energy-induced shocks ahead,” Joe said. Brusuelas, Chief Economist of Consultant RSM US LLP.

However, higher energy prices could drive up inflation and prompt the Federal Reserve to roll back its easing monetary policy sooner, stifling economic growth.

Economists at JPMorgan Chase expect higher oil prices to push the annual inflation rate up to 0.4 percent in the coming months.

In August, consumer prices rose 4.3% from a year earlier, according to the Commerce Department’s price index for personal-consumption spending, the Fed’s preferred inflation gauge. The Fed targets annual inflation of 2%. Oxford Economics estimates that energy prices will help push the annual inflation rate up to 5.1% by the end of the year.

“It’s going to raise inflation expectations somewhat,” said TD Securities analyst Bart Melek. “It could change our perception of what we think the Federal Reserve does.”

In the early and mid-2010s, high oil and gas prices were generally a boon to the U.S. economy, encouraging oil and gas producers to tap substantial shale deposits, allowing steel, equipment, construction workers, The demand for truck drivers and other workers increased.

That may not be the case this time around, said Mr Book of Clearview Energy. He said the pandemic has resulted in a decline in global demand for energy and that despite demand recovery, energy companies are still cautious about drilling because of uncertainty about global demand and investor pressure to keep profit margins high. For, by limiting supply, he said.

write to Josh Mitchell at [email protected]

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