Saturday, February 8, 2014

What Is The Correlation Between Oil Prices And Inflation?

Many investors believe that the movement in oil prices can give them advance signals into how inflation will change in the future. Is there any truth to this, though? Well, Mehmet Pasaogullari and Patricia Waiwood from the Federal Reserve of Cleveland recently ran the numbers to help answer that question once and for all. Here is the summary of their findings, which you can read more about here:
Some analysts pay particular attention to oil prices, thinking they might give an advance signal of changes in inflation. However, using a variety of statistical tests, we find that adding oil prices does little to improve forecasts of CPI inflation. Our results suggest that higher oil prices today do not necessarily signal higher CPI inflation next year, although they do help to explain short-term movements in the CPI.
Being able to predict changes in inflation could make investors a lot of money, but apparently using oil prices to foretell those changes isn't the golden goose some people thought.

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