Oil & Gold Prices Down. A Trend Reversal?

Inflationary concerns were piqued by the up-trend in prices for gold & oil. That trend reversed a bit last week as the price of West Texas Intermediate Crude Oil settled on Friday at $71.15 per barrel, down 7.6% from the near-high of $76.99 reached early the prior week. Gold prices also moved lower to $613.90, off 7.5% from the July high.

Evidence that higher oil prices forced cutbacks in the demand for gasoline as well as some diminution of political tensions could have caused the trend reversal. In fact, the latest monthly figures on real personal consumption expenditures indicate demand for gasoline & oil fell 5.5% from the peak during January of 2005.

These gasoline demand figures through June were roughly consistent with the Department of Energy's estimates of lower demand, but during July & August consumers seem to have grown accustomed to higher prices. Gasoline demand versus last year returned to the plus column.

The four week average of gasoline demand through mid-August rose 1.3% versus last year as a result of firm demand this Summer. Certainly that growth is well off the 4-8% rates of early 2004, but consumers' resilience clearly is in evidence.

The just released figures from the Federal Highway Administration indicated that through 2004, the miles driven in the U.S. by passenger cars grew a steady 2.0% from the year earlier. These figures are available in Haver's USECON database under Highway Statistics.

The latest Short-Term Energy and Summer Fuels Outlook from the U.S. Energy Information Administration can be found here.

Inflation in Germany has largely been the result of rising energy costs as can be seen in the first chart which shows the total index of inflation and the core index excluding energy. The widening difference between the two series is due to the rising price of oil. So far there has been little evidence that the rise in energy prices has had secondary effects on the economy. In this connection, one series to watch is that of the monthly data on German hourly wages for the whole economy that was announced today.

Although the index declined 0.29% in June to 102.1 from 102.4 in May, it was 0.99% above June of 2005. Since the data are not seasonally adjusted, the year to year comparison is the more meaningful.While it is volatile, the second chart shows that wage growth is beginning to accelerate reversing the downward trend started in 2003. The annual increase in hourly wages was 2.68% in 2002, 2.03% in 2003, 1.17% in 2004 and 0.97% in 2005. For the first six months of this year, hourly wages have averaged an increase of 1.2% over the first six months of last year. With declines in the unemployment rate, union demands are likely to rise. Last week, IG Metall, the German steel and metalworkers' union demanded a 7% pay rise for the steel industry. While such demands are likely to be moderated, it appears that the secondary effects of the rise in oil prices are beginning to be felt.