Although low oil prices might be keeping oil producing economies from growing, and this also has an effect on the US economy – Texas, Oklahoma and North Dakota are some of the states affected by low oil prices – the main victim here is the much needed inflation that will prompt the Fed to raise interests. Low inflation stays low also due to the fact that people do not seem to spend their windfall from lower gas prices. The combination of these factors are effectively creating a situation in which low inflation keeps money cheap for longer.
Cheap money is also not generating the inflationary impact that the Fed had hoped for. This means that as long as the barrel of oil stays stubbornly below the $50 USD mark, cheap money will be a given. In fact, the Fed should probably shift some of its attention away from the effects of Brexit on the economy, and instead take oil demand as a more prominent indicator. If other countries do not boost their demand for oil, cheap gas and low production prices will remain alongside cheap money. The long term consequences of this situation could well undermine the economic recovery from the financial collapse in 2008-09.
Looking at the data it is possible to see that the economic recovery took place in an environment of cheap money and expensive oil. Now that growth is slowing down and inflation is slacking, it is time to review these monetary policies and make the adjustments necessary where possible. Hopefully the economy will not be left standing idly by as everyone waits for prices to go up.
