Oil: Lower prices means lower inflation – Nordea Markets

Andreas Steno Larsen, Research Analyst at Nordea Markets, points out that while the Brexit farce continues, oil markets have continued to plummet. 

Key Quotes

“The oil price is now down USD 20 a barrel since 1 October. An oil price at the current levels will have a substantial negative impact on the headline inflation pressure into 2019.”

“It’s not unthinkable that the headline indices in the US and the Euro area head towards 1% in mid-2019, given the current oil price. It will also matter a lot to the input prices of the PMI indices, meaning that the PMI indices (without looking at broader cyclical trends) will suffer just because of the falling oil prices.”

“In particular demand-driven oil price weakness should spill over into other parts of the PMIs than the input prices.”

“Lower headline inflation (due to falling oil prices) is though not an issue for the Fed nor really for the ECB, as long as the underlying inflation pressures and wage growth signals are boiling beneath the surface.”

“Core inflation pressures in the US could though also continue to disappoint in the short-run due to a strong USD versus Asian currencies. China and Japan have exported disinflationary impulses to the US and therefore the weaker core inflation momentum is a lagged result of weaker Asian currencies versus the USD. This downward pressure will persist over the next 3-4 months from an FX perspective.”

“From a relative perspective, US headline price pressures should face more downside risks than the equivalent Euro-area prices, as the USD has become substantially stronger over the past year, while the EUR is a tad weaker since a year ago.”

“While headline input prices are likely heading south on both sides of the pond (due to lower energy prices), the gap between input prices in the US and in the Euro area should continue to narrow (US headline inflation is most likely more sensitive to low oil prices than the Euro area equivalent). Also, in core inflation terms, the risk of a drop to 2% in the US core inflation should be enough to tighten the US-Euro-area core inflation gap. This could bring EUR/USD higher in the beginning of 2019.”