Monday, April 20, 2015

Inflation is now the name of the game | Fed Vice-Chair links oil price to rate rises

The price of oil has risen by over 1.5% since we looked at it last week, and pointed out that there were solid Technical Analysis (TA) reasons for why it might have moved from a downtrend to an uptrend. This latest surge indicates that the new uptrend has legs.

We also pointed out that there are fundamental reasons why oil should be on the rise. As the popularity of shale oil extraction in the US was one of the primary drivers for the slump in the price of oil, it is reasonable to believe that the curtailment of this activity, due to its cost relative to other methods of extraction and the consequent pressure on shale extractors’ margins due to falling prices per barrel, would have the opposite effect.

Fed Vice Chair links oil price to rate rises

At a recent symposium hosted by the International Monetary Fund and the Wall Street Journal, Stanley Fischer, Vice Chairman of the US Federal Reserve, gave it as his considered opinion that the relationship between low inflation globally and the severe fall in the price of oil was a vital one. You can catch the panel discussion in which he was involved here:

Mr. Fisher was also confident that the low oil price was a temporary phenomenon. He believes that when it does start to rise, the inflation rate will do so too. The low or non-existent rise in inflation is now believed to be the main reason for the Fed holding off on core interest rate rises in the US, so it is reasonable to believe that the price of oil has now become an important leading indicator for those of us who try to anticipate developments of this sort.

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