I was on WPR Central Time today, discussing among other things: “Gas and oil prices are starting to decline. We explore what this means for inflation and recession fears.”
Gasoline prices continue to decline, dropping to $4.49 in the week ended July 18 from $5,006 in the week ended June 13.
Source: EIA via FRED.
This is a decrease of 10.3% in five weeks. Since gasoline makes up 3.8% of the weight in the overall CPI package, a 10% decrease during the month results in a decrease in inflation of about 0.4 percentage points on a monthly basis. The June value of m / m inflation amounted to 1.3%.
As noted earlier, most of the fluctuations in gasoline prices are due to oil prices (the rest is due to refinery restrictions). Here are Brent futures for today:
Figure 1: Oil price, Brent (blue) and last day’s Brent futures as of July 19 (red square). Peak-to-trough dates as determined by the NBER are in grey. Source: EIA, ino.com, NBER.
Of course, there are very wide confidence intervals for forecasting based on futures. Using options data, the EIA rated 7/7:
Source: DOE Energy Short-Term Outlook EIAas of 07/19/2022.
Rob Ferrett, host, also asked about the recession, citing Jared Bernstein’s recent statement that it would be difficult to conclude that the US is currently in a recession. I agreedwe were hardly in a recession in May or June (we have the latest monthly data), but many weather forecasters predict recession in mid to late 2023. Based on the 10- to 2-year spread, this also looks likely (despite the sharp drop, a 10- to 3-month spread is still not indicative of a recession).
Figure 2: Probability of a recession for a specified month using a spread of 10 to 3 months (blue), using a spread of 10 to 2 years (brown). July 2022 observation based on data up to 19 July. The NBER identified peak-to-trough recession dates shaded in grey. Source: Treasury via FRED, NBER, author’s calculations.
These probabilities are based on simple probit regressions (with a 12-month horizon) on time spreads over the period 1986-2022. These spreads are shown below.
Figure 3: 10-3 month treasury spreads (blue), 10-2 year spread (brown), both in %. July 2022 observation based on data up to 19 July. The NBER identified peak-to-trough recession dates shaded in grey. Source: Treasury via FRED, NBER.
An inversion in the 10-2 year spread suggests more than a 60% chance of a recession in 2023M07. One caveat is that the 10 year-3 month spread is still positive, suggesting a much lower probability. The 10–2 year spread predicted most recessions, but not 2020 (using the 50% threshold), but also predicted the 1999 recession.