Raising interest rates will increase the cost of money and slow down the economy, but it will not directly help alleviate one of the engines of inflation: energy costs. While Russia has significantly reduced its gas supply to Europe and the price of natural gas on the continent is soaring sharply, oil prices are sailing at a level close to that which fueled inflation in the 1970s.
Oil prices rose to about $ 90 before the war in Ukraine, while after Russia’s invasion, oil cruised last week at a level of $ 120 a barrel, which deprives central bank governors who are determined to fight inflation.
After raising the US interest rate by 0.75%, the sharpest since 1994, the price of oil has receded due to fears of an economic slowdown that will lead to a decline in demand. However, these are still strong compared to last year. Fed Chairman Jerome Powell said “there are a lot of things we can not influence,” and reflected the problematic nature of the jump in energy prices.
Is the price of oil expected to fall? Gil Befman, the chief economist of Bank Leumi, does not think this will happen soon. “The current shortage in the oil market is partly due to the inability of oil producers to rapidly increase oil production, due to low investments made last year, in which spending on oil exploration and development of large fields of large oil producers was 28% lower than the average five years before the corona.”
According to Befman, the increase in investment by energy companies and refineries in the US is moderate and even lower than the increase in demand, which supports prices. “The price of oil,” he adds, “is expected to be affected by economic activity in China; From the continuation of economic measures against Russia; From a possible easing of sanctions on Venezuela; From the negotiations with Iran; “A drop in the price of oil will occur in the longer term, mainly depending on the degree of expansion of supply, and the completion of the transition of major countries from Russian sources to alternative sources.”
The energy item actually caused the index to decline
The rise in energy prices and its components is sharp, fast and painful. In the United States, the energy component constitutes 8.2% of the consumer price index, while in Israel – the energy component constitutes about 7%. 0.6%, while neutralizing energy rose by 0.7%. “Including energy in the index lowered the overall inflation rate. However, in the last 12 months’ calculation, the effect of the price increases is still noticeable, since the index excluding energy rose slightly less than the rise in inflation, which amounted to 4.1%. However, in an international comparison, it is clear that the effect of the clause on the price level in our economy is relatively small. “