Weakened natural gas prices – following a massive run-up last summer – intersected with rising interest rates to ease inflation that had only a few months ago reached a 40-year high.
Further New York Mercantile Exchange gas futures price drops early this year, owing in part to relatively benign winter weather across most of January, along with continued central bank rate hikes last week could further dampen overall inflation, analysts said.
The Consumer Price Index increased at an annual rate of 6.5% in December, according to the U.S. Labor Department. That puts inflation about three times the level that federal officials say is healthy for the economy. Still, the rate decelerated late in 2022, falling from a peak of 9.1% last June, the highest level in four decades.
Analysts at D.A. Davidson credited U.S. Federal Reserve Bank (Fed) interest rate increases that boosted borrowing costs and, by extension, slowed spending and softened upward pressure on prices.
Eighth Rate Hike
The Fed last week increased rates for the eighth time since last March. The latest bump of 25 basis points (bps) brought the cumulative total increase to 450 basis points – the highest level since 2007. However, given progress on the inflation front, the Fed’s latest increase was down notably from the multiple 75 bps hikes last year.
“Importantly, the slowing pace of rate hikes does imply the Fed is more confident that its tightening campaign is having the desired effect of further lowering inflation,” the D.A. Davidson analysts said.
While rates played a big role in curbing overall inflation, a supply/demand driven shift in energy commodities, led by sliding natural gas prices, proved key as well
Energy commodity prices inched ahead at an annual rate of 0.4% in December. They had soared more than 10% last summer, when both oil and gas demand surged. Natural gas futures approached $10/MMBtu at the time, near a 14-year high, driving the energy component of the index and playing an outsized role in the overall inflation measure.
Energy costs last year had increased more than any other category by a wide margin.
Notably, wage inflation amid a robust U.S. job market has eased some but remains elevated.
U.S. employers added 517,000 jobs in January, the Labor Department said Friday, marking the biggest gain since last July. The jobless rate declined from 3.5% the prior month to 3.4%. That marked the lowest unemployment rate in more than 50 years.
Average hourly earnings increased 4.4% in January from a year earlier. That was down from a revised 4.8% in December but still strong by historical standards.
Europe, China Follow
Central banks in Europe are moving with similar haste to raise rates and address inflation on the continent.
The European Central Bank last week raised its benchmark interest rate by 50 bps, following earlier increases. The Bank of England also boosted its key rate last week, extending a trend.
Federal analysts have said that prices were propelled higher by fallout from pandemic-era supply chain disruptions as well as Russia’s war in Ukraine. The latter affected Europe particularly hard on the energy front.
The European Union (EU) has staunchly opposed the war, levying multiple rounds of economic sanctions against the Kremlin. Russia responded by cutting off the bulk of its gas supplies to the EU last year. That marked a major shift given that EU countries in prior years relied on Russia for about a third of their natural gas needs. European countries called for U.S. LNG to fill the void.
European gas prices spiked in 2022 but also have since come down, thanks to American liquefied natural gas supplies, providing some easing of overall inflation on the continent.
China, however, looms large as an inflationary wildcard. The world’s second-largest economy only recently emerged from coronavirus-related lockdowns. Rystad Energy analysts said it remains too soon to gauge how the reopening will play out. Still, there is the potential for a surge in economic activity in China and fresh upward pressure on energy demand and global inflation as a result.
“If China is able to achieve strong economic growth this year, global industrial inflation will rise – bad news for importers of Chinese goods and raw materials,” Rystad analyst Henrik Fiskådal said.
“No extreme price movements in industrial materials are yet to materialize, but prices have increased steadily over the month of January” in China,” Fiskådal added.
That noted, there is a major impediment to gross domestic product (GDP) growth in China. The country’s real estate market “has historically been a significant contributor to GDP growth, but the sector is starting to show cracks,” Fiskådal said. “As the country’s population is expected to have peaked in 2022, real estate experts are pessimistic about the market’s future.”
