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posted on 03 January 2016

Cheaper Crude Oil Affects Consumer Prices Unevenly

from the Dallas Fed

-- this post authored by Alexander Chudik and Janet Koech

Crude oil prices fell sharply in the last half of 2014, concluding a four-year period of relative price stability. Prices declined 41 percent between June and December 2014 - from $102.51 a barrel to $60.70.

The steepness of the decline is second only to the collapse during the 2008 economic crisis, when oil fell from $129 to $37 per barrel within six months. Since summer, crude oil prices as measured by U.S. refiners' acquisition costs have traded below $50 a barrel. Both Brent and West Texas Intermediate crude oil benchmarks dipped below $40 in December 2015.

Unlike the 2008 episode, which was mainly demand driven, both demand and supply factors have played a key role in the recent period. On the supply side, U.S. shale production rose due to technological innovation, and Middle East oil output grew. On the demand side, sluggish global growth constrained consumer purchases.

U.S. consumers experience crude oil price drops largely at the pump. Consumers spent an average of $2.17 per gallon for unleaded gas in November 2015, down from an average of $3.60 per gallon in the summer of 2014.

Oil Price Changes

Economists call the impact of oil price shocks on inflation a "pass-through" effect. The pass-through depends on several factors, both direct and indirect.

[click on image below to continue reading]

Source: http://www.dallasfed.org/assets/documents/research/ eclett/2015/el1511.pdf

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