Crude oil prices have dropped 55 percent over the past year since June 2014 caused by a glut in oil supplies, slower international demand, and no production cuts from OPEC.
Consumers have benefited from lower gasoline prices at the pump but the unique confluence of factors weighing down crude oil also added some deflationary pressures across the globe, including the United States, during a critical period when the U.S. Federal Reserve has been waiting for the right time to hike interest rates in tandem with inflation moving higher to the Fed’s 2 percent inflation target.
Although oil prices rebounded in May 2015, in recent weeks they have been under pressure and returned to March 2015 levels. WTI has declined over 20 percent since its peak in May 2015.
The takeaway is that falling oil prices and a strong dollar have kept inflation at bay and clouded the economic outlook for the Federal Reserve to feel confident about raising interest rates during the remaining months of 2015.
Federal Reserve members acknowledged on Wednesday in their latest policy statement that declining energy prices and decreasing prices of non-energy imports have partly caused inflation to run below the Committee’s longer-run objective.
But later in the statement, Fed members emphasized that they expect inflation “to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate.”
The Fed statement explained that it will be appropriate to raise interest rates after “further improvement” is seen in the labor market and they are reasonably confident that inflation will move back to its 2 percent objective over the medium term.
Based on the narrative in the Fed’s latest policy statement, it is clear that Fed Committee members plan to wait a little longer and hope to weigh more economic data before sending out a signal that a rate hike is around the corner.