So goes oil…so goes the economy. Today we posted an update as to why oil price spikes hurt even more when disposable incomes are already under pressure as it acts as an additional tax on the consumer. Of course, this additional tax on a consumer that is already receiving more than 23% of their incomes from government transfers, real personal incomes on the decline and food and energy absorbing more than 22% of wages and salaries doesn’t bode well for increases in real consumption that supports healthy organic economic growth.
The reason that I bring this up is that yesterday we posted the CNBC interview with Lakshman Achuthan who was reiterating his point that a recession is still coming despite the recent uptick in the GDP data. It is an embarrassing display for the commentators on CNBC who just cannot, as Lakshman puts it, “see the forest for the trees.” While the media focuses on what has already occurred, looking at reports such as GDP, Lakshman talks about the pervasive decline, a “contagion”, in the forward looking indicators. He states that the recent data upticks have done nothing to reverse the recessionary call that the ECRI has made due to what the leading indicators are telling them.
Today, as I was updating my various oil data, I noticed that the recent spike in the 24 month rate of change in oil prices has normally been associated with recessions. The obvious question then becomes could this indicator be confirming the recession call by the ECRI. Very quickly, it is VERY important to remember that the National Bureau of Economic Research (NBER) is the group responsible for dating recessions. The last recession that started in December of 2007 was not identified by the NBER until 12 months later in December of 2008. Therefore, as Lakshman stated previously, it is likely that we are in or about to be in a recession but it will be some time before the NBER actually dates it.
With that said I began to think about the impacts of oil price spikes in relation to inflation. One of the key issues that confounds and consternates the average American is the difference between headline and core inflation. For them the only type of inflation that matters is the cost of living which is going up.
Therefore, I decided to look at oil prices as a percentage of core CPI and overlaid it with Lakshman’s Weekly Leading Index (WLI) Growth Rate. This is the specific index that he addressed in his interview with CNBC.
The top chart is a little difficult to read as there is a lot of data contained in it but basically is shows you that there is a very high correlation between spikes in oil prices as a percent of core CPI and declines in the WLI growth rate. To make the chart a little easier to digest I focused on the last decade. In 2000 oil prices were nearing 20% of core CPI when the recession started and declined into the recession which coincided with the recession reading by the WLI index. Again, in 2008, this occurred but this time oil was 60% of core CPI.
While the recent call by the ECRI has not been validated by the NBER it is interesting to note that with oil recently ticking off 50% of core CPI at its peak and now declining it may just be confirming that the recessionary reading by the WLI index may be right after all.
In the words of Ronnie Dunn the “Cost of Livin’ Is High And Goin’ Up”.