Recent reports indicate that oil prices will need to fall significantly for the US Consumer Price Index (CPI) to reach the Federal Reserve’s 2% inflation target. According to Citigroup Commodity Strategies, a drop in oil prices will have a significant impact on US inflation.
Citigroup strategist Eric Lee projects that Brent crude will reach $60 per barrel by the second half of 2025, a 20% drop from current levels of around $75. This reflects expectations regarding the impact of lower oil prices on US inflation. Citigroup’s analysis suggests that a 10% drop in oil prices could reduce the US Consumer Price Index by 0.15 percentage points.
Citigroup’s analysis also indicates that oil prices account for approximately 80% of wholesale gasoline prices and approximately 50% of retail gasoline costs. However, this relationship is not directly proportional to retail gasoline prices due to margins earned by refineries and gas stations, as well as taxes. In this context, Citi estimates that gasoline prices represent only about 3% of the CPI, while the energy sector contributes about 6% of the total index. While food accounts for about 14% of the CPI, the core index, which excludes food and energy, accounts for about 80%.
Potential Impacts on the CPI:
The Citi team expects that a 20% drop in oil prices could translate into a 0.3 percentage point drop in the CPI in the short term, with an additional 0.08 percentage point impact on the food price index and 0.16 percentage point impact on the core index over the next two years. A 33% drop in oil prices could reduce the index by about 0.5 percentage points in the short term, with additional impacts on food and core consumer prices.
Geopolitical Risks and Tariff Impacts
On the other hand, Citigroup estimates that to reach the 2% inflation target, crude oil prices would need to fall to $53 per barrel. This is in line with other estimates that gasoline prices will fall to around $2.60 per gallon. This analysis captures the potential impact of lower crude oil prices on US inflation, despite the challenges that may arise from other factors such as rising food prices and the effects of the core Consumer Price Index.
Geopolitical risks are an important factor that can impact the global economy and energy markets in general. In this context, the impact of geopolitics on oil prices and commodity markets is critical. Despite expectations of lower oil prices, geopolitical factors can lead to unexpected changes in oil markets, leading to price fluctuations.
Economic sanctions, particularly those imposed on countries such as Iran and Venezuela, are among the most prominent geopolitical risks affecting global oil markets. If further sanctions are imposed on these or other countries, the global supply of oil could be significantly impacted, leading to higher prices.
Sanctions on these countries limit their ability to export oil, creating tension in global markets that could lead to higher crude oil prices, which could, in turn, impact gasoline prices in the United States. In addition, the tariffs imposed by the United States on certain countries, such as China, Canada, and Mexico, could have widespread economic impacts.
For example, projections indicate that a 20% tariff on China could contribute to an increase in the US core consumer price index by 0.2 percentage points from March to May 2025. When additional tariffs are imposed on imported goods, prices of goods and services within the US market could increase, deepening inflationary pressure.
Future impacts on US consumers:
Tariffs on imports from Canada and Mexico, as well as tariffs on steel, could increase the cost of some essential goods in the United States. In turn, these tariffs could contribute to higher crude oil prices, increasing energy costs in the US market.
These geopolitical challenges, along with tariffs, are counterbalanced factors that may mitigate the impact of lower crude oil prices on reducing inflation. Despite lower oil prices, geopolitical pressures and higher tariffs could contribute to higher consumer costs, thus complicating efforts to control inflation.
Geopolitical risks, such as economic sanctions and the imposition of tariffs on certain countries, are among the factors that could impact oil and commodity prices. These factors contribute to influencing inflation levels and further complicate efforts to achieve the Federal Reserve’s 2% inflation target.
One positive effect of lower oil prices is the expected benefits for American consumers. Lower gasoline prices could reduce household fuel spending, providing some relief for consumers in the coming years. However, the impact of geopolitical conditions and other economic factors, such as tariffs and other price increases, will continue to influence the effectiveness of this decline in reducing inflation levels.
Expectations indicate that lower oil prices will have a significant impact on US inflation. However, this impact depends on several factors, including other geopolitical and economic factors, such as tariffs, and developments in global energy markets. If oil prices decline as desired, it could help reduce US inflation in line with the Federal Reserve’s target. However, risks surrounding the global economy could limit these benefits.
