Oil prices likely to drop, keeping inflation in check

: 0 Comment(s)Print E-mail Xinhua, August 25, 2011

Adjust font size:

As the United States wrestles with a sluggish economy and the political debt drama, the good news is that the price of oil is likely to keep inflation in check, U.S. analysts said on Wednesday.

Oil prices increased Wednesday on the global commodities market as U.S. demand heightened and amid concerns over Libya' s political crisis. In London, Brent crude shot up 40 cents to 109.71 U.S. dollars after rising 90 cents the previous day.

But despite the increase, some economists said oil price will come back down, which will ease inflation.

"As oil price...declines further, the rate of inflation in both the U.S. and Europe should decline over the next year and probably beyond," said James F. Smith, chief economist at Parsec Financial who formerly served on the President's Council of Economic Advisers.

That is because oil is critical to the economy and is used widely, from heating homes to fueling transportation to powering office buildings. And when those costs rise, companies pass them on to consumers.

Another bit of good news is that disposable personal income in the United States is still rising faster than the Consumer Price Index or the Personal Consumption Expenditure deflator, and analysts expect that to continue.

So long as that happens, there should be continued increases in retail sales - although not every month - both for goods produced in China and elsewhere, as well as services, which are overwhelmingly produced at home, Smith said.

Growth to remain weak, but will hold down inflation

While economic growth is likely to remain weak, one silver lining is that the trend will keep inflation in check, analysts said.

Wells Fargo on Friday forecast a GDP rise of 1.6 percent in 2011 and 1.1 percent in 2012, which is substantially lower than the 1.7 percent and 1.9 percent forecasts the company made just a few weeks ago.

And Goldman Sachs economists on Friday slashed GDP growth forecasts for the third time this month, clocking third quarter GDP at a mere 1 percent and the fourth quarter at 2 percent. The investment bank had previously called both quarters at 2 percent.

In the absence of appropriate policy intervention from the European Central Bank, the Federal Reserve and the U.S. Government, it is "entirely possible the current downward spiral in the economy and financial markets will become self-reinforcing," Wells Fargo reported.

A temporary uptick

Inflation, however, may still see somewhat of an uptick before tapering off or decreasing. The Labor Department reported last week that wholesale prices, which excluded food and energy, rose 0.4 percent, the largest increase since January, after a 0.3 percent uptick the previous month.

U.S. Federal Reserve chairman Ben Bernanke has recently faced criticism that the Fed' s policies are driving up inflation. Bernanke contended that price increases are temporary and insisted that inflation will remain low.

Wells Fargo also noted Friday that inflation is running a bit hotter than the Fed would like, with the CPI rising 0.5 percent in August and the core CPI rising 0.2 percent.

Higher food prices for Americans

But while inflation in the United States has not hit the high levels seen elsewhere in the world, Americans have still been complaining of higher grocery bills.

A Rasmussen poll earlier this month found that 93 percent of Americans surveyed said they are paying more for groceries than a year ago.

Still, the rate of inflation remains too low to be a significant factor in the growth of disposable income, said Barry Bosworth, senior fellow at the Brookings Institution.

Rice price hike cause concern in Asia

Meanwhile, Asia may face new risks of inflation, as newly elected Thai Prime Minister Yingluck Shinawatra has vowed to improve living standards in her country' s rural communities by raising the price of rice.

On Wednesday Thailand raised interest rates for the seventh time in a row in a bid to stem inflation that could result from the prime minister' s plans to boost the incomes.

Thailand is a major exporter of the staple food, and Asia accounts for 87 percent of the world' s rice consumption. The possible rice price hike in Thailand has raised concerns of inflation in the region.