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This week, President Trump claimed to have a solution to the Fed’s 3+ year battle against inflation. He demanded the OPEC lower oil prices and the world drop interest rates. President Trump has also insisted that the US produces more crude oil throughout his campaign. So, is this mathematically possible? At a high level, there certainly is a strong correlation between CPI inflation and oil prices, as seen below. Oil prices, categorized as “energy” in CPI, make up ~8% of the index. Energy costs also flow into other components like Food. In this study published by the Fed itself, they examined the impact of a 10% increase in oil prices. The increase raises Energy CPI by +2.3% over 2 quarters and then it remains relatively stable. Food CPI rises +0.3% and Core CPI rises +0.1% over the next 8 quarters. Direct effects are seen immediately, as evidenced by the increase in Energy CPI. Secondary effects take time to flow through, but they are also material. For the sake of Trump’s plan to lower prices, let’s assume inflation reacts proportionally to a -10% drop in oil prices. Based on this math, we can make the following general rule of thumb: A $10 DECREASE in oil prices would LOWER inflation by 0.2%. Keep in mind, the drop in oil prices would take 6-8 quarters to fully impact CPI inflation, as outlined above. Trump wants IMMEDIATE rate cuts. Core CPI is at 3.2%, 120 basis points above the Fed’s 2% target. That’s 6 intervals of 20 basis points, or a total of six $10 drops needed in oil prices. Oil prices would need to fall by ~$60 for inflation to hit 2%. This makes a TON of assumptions, but let’s go with it. As of Friday’s close, oil prices are trading around $75. A $60 drop would mean we need to see $15 oil prices, or a whopping ~80% decline. This also does not account for the fact that Trump wants IMMEDIATE rate cuts. Oil price impacts on inflation take 2+ years to play out. Is it possible for oil prices to fall to $15? The short answer is yes, but it’s HIGHLY unlikely. For example, during the 2020 pandemic, oil prices fell to -$30 as the world went into an economic lockdown. A shock-type event is needed for an 80% drop in oil prices. Most US producers would not even be profitable at a crude oil price of $15/barrel. As shown below, existing wells have breakeven points of $31-$45 per barrel. New wells would need oil prices to be at least $59 to break even. US oil would not survive at $15 crude oil. Even if you based the math of headline CPI, it would still require a $45 drop in oil prices. With headline CPI currently at 2.9%, a $45 drop would theoretically drop inflation to 2.0%. That’s a 60% drop in oil prices that would have to come immediately. Can Trump do it? In summary, there is a high correlation between oil prices and inflation. However, based on a variety of assumptions, we need to see an 80%+ DROP in prices to get 2% inflation. Is Trump’s plan possible? submitted by /u/XGramatik |
There are so many scams littering the AI start-up space that crazy stuff like this is happening . . .
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