Soaring energy prices raise concerns about inflation and the economy in the United States

Rising energy prices could push up inflation over the next few months, dampen consumer spending on other products and services and ultimately slow the US recovery, economists say.

“For consumers, it’s like a tax,” Oxford Economics economist Kathy Bostjancic said of the price increase. While consumers are likely to be in a hurry, the rise in energy prices “should be extreme and prolonged” to halt the economic recovery, she added. More likely, “we would just see growth slow further or a longer pause before growth picks up, and we just get a little more rigid inflation in the meantime.”

Andreas Steno Larsen, analyst at Helsinki-based Nordea Bank ABP, is more pessimistic. He said rising energy prices this year had caused him to lower his estimate of US growth next year to 1.5% from 3.5%. While he believes oil and gas prices will remain stable in the coming months, he also envisions the worst-case scenario in which they would rise another 40% next year, enough to plunge the US and global economy. into a brief recession in the middle of the year. 2022.

The rise in prices is due to growing demand and tight supplies. As the pandemic subsides and consumers around the world increase their spending, factories and service providers are ramping up production, which requires energy. Oil supplies are tight because oil-exporting countries have decided to increase production in stages instead of opening the taps wider.

Natural gas supplies are running out after a freeze in Texas earlier this year boosted demand and Hurricane Ida forced nearly all of Gulf of Mexico gas production offline, as well as ‘higher demand from Europe where stocks fell due to hot weather, lackluster wind – power generation and lower imports from Russia.

Coal prices have been pushed up by growing demand, which is hampered by supply constrained by plans to reduce carbon emissions.

Many analysts believe these factors will drive prices further in the coming months. Moody’s Analytics predicts oil will rise to between $ 80 and $ 90 per barrel early next year from $ 79 now and natural gas prices to $ 6.50 to $ 7 per million U.K. thermal units, down from 5.5650 dollars. JPMorgan Chase & Co. gives the worst-case scenario of an increase in oil over the next three years and reaching $ 190 a barrel in 2025. Electricity prices rose 5.2% in August from last year. The previous year, the largest increase since early 2014, according to the Labor Department.

Energy prices are volatile, even in normal times, and particularly unpredictable today due to the cloudy economic outlook and the way governments and investors will respond to the shortage of supply. Investors are pressuring companies to keep prices and profit margins high by resisting a drastic increase in production.

Energy represents an important part of consumers’ budgets. In August, about 7% of consumer spending was on energy, according to the Ministry of Labor. Historically, high energy prices have often preceded recessions. Consumers cannot easily reduce their consumption in the short term, as they can with discretionary shopping, so higher prices act like a tax, draining the money they have available to spend on other goods and services. .

Growth slowed sharply this summer, as the rise in Covid-19 infections from the Delta variant led to a new round of trade restrictions and consumer caution. The Federal Reserve Bank of Atlanta estimates that growth slowed from 6.7%, on an annualized basis, in the second quarter to 1.3% in the third.

The rise in prices is already raising fears of an economic crisis in Europe and Asia, where shortages are particularly acute. In the United States, analysts believe the effect should be less severe for several reasons. Natural gas prices have increased much less because the United States is a large producer of this product and a large portion of the supply remains in the country. Gas supplies are not as tight as oil stocks.

Households have a savings cushion thanks to federal stimulus checks and unemployment insurance. “With American households with more than $ 2 trillion in excess savings over pre-pandemic levels, the United States is in a much better position to absorb any energy-induced shock to come by. relation to our European and Asian trading partners, ”said Joe Brusuelas, chief economist at consultant RSM US LLP.

However, higher energy prices could worsen inflation and prompt the Federal Reserve to withdraw its accommodative monetary policy sooner, thereby dampening economic growth.

Economists at JPMorgan Chase estimate that rising oil prices could push up the annual inflation rate by 0.4 percentage points 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 expenditure, the Fed’s preferred inflation indicator . The Fed is targeting annual inflation of 2%. Oxford Economics predicts that energy prices will help push the annual inflation rate up to 5.1% by the end of the year.

“This will raise inflation expectations somewhat,” said analyst Bart Melek of TD Securities. “It could change our perception of what we think the Federal Reserve is doing.”

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

That might not happen this time around, said Kevin Book, managing director of ClearView Energy Partners LLC, a Washington, DC-based research firm. The pandemic has caused global demand for energy to collapse and although demand has recovered, energy companies are still cautious about drilling due to uncertainty over global demand and pressure from investors to maintain high profit margins, in part by limiting supply, he said.

Write to Josh Mitchell at [email protected]