CHART OF THE DAY: A Quick Reminder That Higher Oil Prices Are DEFLATIONARY

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The Fed will make an interest rate decision today, and the general expectation is that they will do nothing.

Some might wonder whether the tone will be a tad more hawkish, given the improvement in the labour market and the impact of oil on inflation readings.

It’s possible, but it’s worth keeping this in mind: Higher oil prices are deflationary.

Sure, higher gas prices put upward force on the CPI, but they have the effect of sucking money out of the US economy, depressing spending on everything else, and that causes price compression.

Here’s a chart from SocGen looking at commodities since the beginning of the year.

Other than oil, pretty much everything else is flat. And lately the trend is downish for base metals, livestock, agriculture, and other commodities.

That’s not to say that oil prices don’t bite, but rather that if you think the response to higher oil is to make money tighter, then you’re missing the point.

chart of the day, sectoral excess returns, march 2012

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