Question

Will a decrease in oil prices have an immediate impact on the U.S. core inflation rate? Why or why not?

Answer 1

The reduction in oil prices from their peak levels has had an immediate impact on the U.S. core inflation rate because it has imparted some stability to financial market thus the immediate prospect of monetary tightening has diminished. The prices of oil and inflation have usually being connected in a cause and effect relationship. As oil prices increases or decreases, inflation follows in the same direction. This occurs because oil is a main input in the economy - it is used in critical activities such as heating homes and fuelling transportation, thus when the cost of input increases the cost of end products also goes up.