How Much Does the Price of Oil Impact Inflation?

Offshore Industry oil and gas production petroleum pipeline.
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Inflation heated up in May, increasing 8.6% for the 12-months — the largest 12 months increase since December 1981, according to the Consumer Price Index (CPI) data released on June 10. While the increase was broad-based, it’s notable that the energy index rose 34.6% over the past 12 months, while gas rose 48.7%. The Russian-Ukraine war has been putting pressure on gas prices, which have been soaring in the past weeks. This, experts say, will continue to drive inflation and in turn, affect prices across the entire economy — with no quick end in sight.

Ken Shinoda, portfolio manager at DoubleLine Capital, told GOBankingRates that “the war in Ukraine continues to put pressures on supply which will keep oil and energy prices elevated. This is feeding through into headline CPI.”

In addition, the gasoline index increased 48.7% over the year, while the index for fuel oil more than doubled, rising a staggering 106.7% — the largest increase in the history of the series, which dates to 1935, the Bureau of Labor Statistics (BLS) said. And these increases are having ripple effects throughout the entire economy.

Salvatore J. Stile, founder and chairman of Alba Wheels Up International, a shipping and logistics, import/export company, told GOBankingRates that every stage, from production to delivery, requires the use of oil.

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“Air, land, and sea shipments have all become more expensive as a result of record oil and gasoline costs. These increases in costs have been shifted to consumers, which is one of the primary drivers of inflation.” Stile said. “Fuel surcharges are at historic highs, and these adjustments get passed directly on to shippers, and in turn, on to consumers. If they are not passed on, it just erodes the financial stability of the companies that are absorbing it.”

In May, the energy index increased 3.9% after falling 2.7% in April, while the gasoline index rose 4.1% in May after declining in April. The index for natural gas rose 8% in May, the largest monthly increase since October 2005.

John Catsimatidis, chairman and CEO of Red Apple Group — which owns and operates United Oil Refinery and 400 gas stations — as well as chairman and CEO of Gristedes & D’Agostino’s Supermarkets, told GOBankingRates that “contrary to anything that Washington blames this on, inflation is being driven by the continuing spike in crude oil prices.”

He added that “70% of the products on American shelves are delivered there by trucks that run on diesel fuel. As crude oil continues to rise – now at approximately $122 per barrel, 10 dollars higher than last month — costs will continue to rise on manufacturers, and prices will do the same on American shoppers,” he said. “We must address the price of oil and gas, by allowing North American oil companies to create and ship more products domestically, to bring down the price of oil and, in turn, reduce inflation. We must make North American oil companies a partner in the solution and stop treating them like the enemy.”

David Russell, TradeStation Group VP of Market Intelligence, told GOBankingRates that energy is driving inflation thanks to tight oil inventories and record gasoline prices and that it seems worse than 2008 because at that time a recession had already begun and it was only a matter of time for demand to cool.

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“This time, we’re entering summer driving season. There’s also worsening inflation in food, shelter, vehicles and even apparel,” he said. “Just this morning, the market is pricing in an additional 25 basis points of tightening in 2022. The impact on rates is more curve flattening, with the 2-year rising more than the 10-year yield. It’s a squeeze between higher rates in the near term and weaker growth further out.”

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