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    How soaring energy costs could hobble the covid-19 recovery

    NSUEL price Over the past month, especially during brutal waves, we have seen the same vertical upslope as the number of covid-19 cases. Coal and gas prices have reached record highs. Asian spot prices for gas have risen nearly 1,000% over the past year. Oil costs have skyrocketed as a shortage of other fuels has boosted demand for crude oil.

    The surge in energy costs is, in many respects, a manifestation of the same phenomenon driving the backlog of supply chains around the world. Supply stagnated due to an unexpectedly strong recovery in demand. Confusion, such as the shortage of hydropower due to drought, is exacerbating the shortage. In response to energy shortages, we are rushing to reduce inventories. But soaring fuel prices are more sinister than supply chain problems. Past energy shocks are associated with not only inflation but also a serious recession, as illustrated in the economic downturn of the 1970s. What does the latest crunch hold?

    The impact of expensive energy on inflation is already clear. In the euro area, headline annual inflation surged to 3.4% in September as energy costs rose 17.4%. Underlying “core” inflation (excluding food and energy prices) rose by a more modest 1.9%. In the United States, inflation rose further to 4% in September. However, when energy costs increased by 24.8%, the headline rate was even higher, at 5.4%. These numbers are likely to rise further in the coming months, as the October fuel price hike has not yet been reflected in the statistics.

    Energy’s contribution to inflation begins to decline when prices level off. This could be in the coming months, even faster if winters aren’t colder than usual. A recent analysis by economists at bank Goldman Sachs showed that the impact of energy costs on US year-on-year inflation in September was 2.15 percentage points, but could rise to 2.5 percentage points by the end of this year. I have. The headline rate will be 5.8% and the other components will remain constant. Then, by the end of 2022, it will be slightly negative.

    How about the damage to growth? At least in the short term, the main factors are the impact on consumption and investment. In the short term, households and businesses cannot easily reduce their energy use in response to rising costs and spend less on other products and services. According to a study by the banks Paul Edelstein of State Street and Lutz Kilian of the Federal Reserve Bank of Dallas, this effect is focused on the consumption of durable consumer goods. A 10% increase in energy prices is associated with a 4.7% decrease in spending on durable consumer goods (and especially a significant decrease in vehicle purchases).

    However, researchers also note that, given the proportion of energy in the budget, consumption tends to be lower than expected as fuel costs rise. This is probably because energy shocks tend to lower emotions. James Hamilton of the University of California, San Diego, studied the historic oil shock and found that a 20% increase in real energy prices was associated with a 15-point decline in the consumer confidence index. (American emotional gauges collected by the University of Michigan have fallen by almost 17 points since April 2021.)

    If consumers use their savings to meet higher bills, energy-induced slumps can be mitigated. By the end of 2020, households in large, rich economies had accumulated more than 6% of “excess” or above-normal savings. GDP.. Nonetheless, Goldman analysts believe that costly energy will reduce US consumption growth by 0.4 percentage points this year and 0.5 points in 2022. It eases the burden on the supply chain, which has been emphasized by the particularly strong demand for durable products. Those who complain that it’s half empty may be worried that power outages in places like China could lead to further shortages.

    Importantly, the cost of shock depends on how the central bank responds. Fuel prices tend to affect household inflation expectations. This will be unwelcome news for central bankers who are already concerned about high inflation. A study by Killian and Xiao Ching Chow, also from the Dallas Federated Banks, suggests that energy prices are nothing more than that, primarily affecting short-term expectations. These expectations can be adjusted just as quickly when energy prices fall.Some central banks like Bank of EnglandNevertheless, we may be worried that energy shocks exacerbate the risk of inflation expectations falling off target. But the dilemma is that overreacting, just as energy prices return to Earth, further curtails consumption and induces deflationary pressure.

    Unfortunately, fuel

    The higher the price, the greater the effect. Homes and businesses will be able to better reduce their exposure to energy. Indeed, studies by John Hasler, Park Roussel, and Connie Olofson of the Institute for International Economic Studies in Stockholm suggest that expensive energy influences the nature of innovation. Companies direct creative efforts to save on scarce inputs. When energy is plentiful, they focus on capital or labor-saving innovations. In contrast, when energy is scarce, businesses do more to improve the energy efficiency of production, undermining innovation as in the 1970s.

    But the degree to which history repeats depends on what the government does. They are politically popular but can protect customers from higher energy prices that will delay the moment of transition from dirty fuels. Alternatively, you can encourage investment in renewable energy capacities to ease energy constraints. Such bold actions can completely end the threat posed by expensive coal, gas and oil. ■■

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    This article was published in the printed Finance & Economics section under the heading “Tanks for nothing”.

    How soaring energy costs could hobble the covid-19 recovery Source link How soaring energy costs could hobble the covid-19 recovery

    The post How soaring energy costs could hobble the covid-19 recovery appeared first on California News Times.

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