The Impact of Energy Prices on Disinflation in the U.S. and Europe

Headline inflation in the U.S. fell to its lowest level since November 2021, according to official data. The month-over-month headline Consumer Price Index (CPI) decreased, resulting in an annual change of 6.5%, down from 7.1% in November. However, a closer examination of the report revealed that there was an ongoing acceleration in shelter costs and services inflation, which the Federal Reserve (Fed) has acknowledged will be challenging to bring down. The main contributor to the decline in the CPI was a 9.4% drop in gasoline prices, leading to a 4.5% decrease in the energy subindex month-over-month. Analysts have noted that the drastic decline in energy prices may force the Fed to maintain a hawkish stance as they cannot rely on energy prices as a consistent source of disinflation. After the release of the inflation report, Patrick Harker, President of the St. Louis Federal Reserve (Fed), joined the group of policymakers who believe that a continued hawkish monetary policy is necessary to curb inflation. Despite acknowledging the progress made on inflation in the past three months, he still believes that the terminal rate will need to be above 5% to reach the Federal Reserve's 2% inflation target.

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