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Search Site Home > Newsroom > St. Louis Fed's Bullard Discusses Oil Prices and In ation 1/14/2016 MEMPHIS, Tenn. – Federal Reserve Bank of St. Louis President James Bullard discussed “Oil Prices, In ation and U.S. Monetary Policy” at the Economic Club of Memphis on Thursday. “The recent movements in crude oil prices are very substantial in historical context,” he said. Oil prices have declined to around $30 per barrel this week from more than $105 For media inquiries contact: Laura Girresch mediainquiries@stls.frb.org O ce: (314) 444-6166 Cell: (314) 348-3639 James Bullard St. Louis Fed President and CEO per barrel during the summer of 2014, likely due in part to increased supplies from new oil extraction methods that became economically feasible during the 2008-2014 price regime. Oil price movements are an important component of headline in ation, and the declines in crude oil prices since mid-2014 have contributed to very low year-over-year headline in ation in the U.S., Bullard said. He added that once oil prices stabilize, headline in ation should return to the Federal Open Market Committee’s in ation target of 2 percent, although it might take longer than previously thought. “Headline in ation will return to target once oil prices stabilize, but recent further declines in global oil prices are calling into question when such a stabilization may occur,” he said. Bullard also discussed the possibility that in ation expectations are being in uenced by the declining oil prices. “In ation expectations in the U.S. may be falling. If so, this would put downward pressure on in ation,” he said. Overall, however, Bullard suggested that relatively low oil prices remain a net positive for the U.S. economy. “For the macroeconomy as a whole, the relatively low crude oil prices the U.S. is enjoying today are likely a bullish factor,” he said, citing as an example the acceleration in real personal consumption expenditures growth from mid-2014 to mid-2015. Oil Prices and Headline In ation While large movements in crude oil prices can substantially in uence headline in ation, Bullard explained this in uence is relatively short-lived once oil prices have stabilized. “The fall in crude oil prices to lower levels, even if maintained inde nitely, has only a one-time in uence on the year-over-year in ation rate,” he said. Bullard looked at two scenarios to show what the in ation rate would be once oil prices stabilize. The rst scenario assumes that oil prices had stabilized at the November 2015 level of approximately $40 per barrel and that all other prices had continued to increase at the same pace as they did during 2015. Under this scenario, the headline James Bullard is president and chief executive o cer of the Federal Reserve Bank of St. Louis. In these roles, he participates in the Federal Open Market Committee (FOMC) and directs the activities of the Federal Reserve’s Eighth District. President's Website Speeches & Presentations Video Appearances Media Interviews Research Papers consumer price index (CPI) in ation rate at the end of 2016 would be more than 2 percent, he said. In the second case, he described a scenario in which oil prices instead continue to fall and stabilize at $20 per barrel by June 2016. Under this scenario, the headline CPI in ation rate would be 0.6 percent at the end of 2016, and would not reach 2 percent until mid-2017. Thus, while the argument that headline in ation will return to target once oil prices stabilize appears to hold, Bullard noted that it takes longer for CPI in ation to return above 2 percent. Oil Price Declines and In ation Expectations Traditional central banking suggests that policymakers should “look through” changes in crude oil and other commodity prices to gauge underlying trend in ation, Bullard stated. “However, one circumstance where one may be more concerned is when in ation expectations themselves begin to change due to the changes in crude oil prices,” he said. Bullard noted that expectations of in ation are a major determinant of actual in ation, according to macroeconomic theory. He explained that low in ation expectations may keep actual in ation lower, all else equal, making it more di cult for the Fed to return in ation to target. Although longer-term in ation expectations in principle should be independent of movements in crude oil prices, Bullard pointed out that the correlation between the two variables has been very high over the past 18 months. In particular, he noted that market-based indicators of in ation expectations have fallen in tandem with the decline in oil prices since mid-2014. “I have argued that market-based measures of in ation expectations have been unduly in uenced by the large movements in crude oil prices,” Bullard said. “Nevertheless, with renewed declines in crude oil prices in recent weeks, the associated decline in marketbased in ation expectations measures is becoming worrisome.” Oil Prices and the U.S. Economy Bullard reiterated that for the U.S. macroeconomy, relatively low crude oil prices remain a net positive. “Automobile sales, for instance, have been strong,” he said. “More generally, real personal consumption expenditures growth accelerated during the period of the large drop in oil prices from mid-2014 to mid-2015. This could be viewed as mild evidence that the oil price decline is a bullish factor for the U.S.” GENERAL Home About Us Bank Supervision Careers Community Development Economic Education Events Inside the Economy Museum Newsroom On the Economy Blog Open Vault Blog OUR DISTRICT Little Rock Branch Louisville Branch Memphis Branch Agricultural Finance Monitor Housing Market Conditions SELECTED PUBLICATIONS Bridges Economic Synopses Housing Market Perspectives In the Balance Page One Economics The Quarterly Debt Monitor Review Regional Economist ST. 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