Oil price decline likely to bring US inflation's expectations to lowest level since 2008-09 crisis

Inflation expectation is the United States as measured by 5year-5 year (5y-5y) forward inflation expectation rate is reaching for the bottom it made in February. The forward inflation expectations dropped to 1.42 percent in February, before bouncing back to 1.83 percent in late April. Since then it has been in decline and has already dropped by 38 percentage points.

It is likely to decline further and probably to a new bottom since the 2009 crisis when it reached below 0.5 percent in early January. It is yet one of the many measures that point to the fact that central bankers’ monetary policies only postponed and slowed down the effects of the crisis, with their record easing. Since the beginning of the drop in oil prices back in summer of 2014, forward inflation expectations have declined about 1.2 percentage points.

WTI crude oil price peaked in early June around $51.7 per barrel and has declined since then to $46.7 per barrel as of now and we expect at least another 10 percent decline in oil price, which will surely take its toll on inflation expectations and push central bankers to scratch their heads looking for solutions. Further weakness in the market-based measure of inflation, likely to derail U.S. Federal Reserve’s rate hike plans.