Energy prices are falling: Since January 20th, both crude oil and natural gas prices have fallen in a straight-line, now down 10%+ from their highs. President Trump’s solution to inflation has been largely focused around LOWER energy prices.
Will it work?
Over the last 2 weeks alone, natural gas prices are down more than -15% from their highs. Furthermore, oil prices are down -6.5% and just hit their lowest level of 2025. In the final months of 2024, we saw a sharp run higher in both commodities which is now being undone.
This comes after President Trump has made lower energy prices a central part of his policy plan. He demanded OPEC lower oil prices and the world drop interest rates. President Trump has also insisted that the US produces more crude oil throughout his campaign.
We recently published a threat showing how oil prices and energy as a whole could reduce inflation. The energy component in CPI makes up ~8% of the index. Energy costs also flow into other components like Food which means lower energy prices would help lower inflation.
Following the US election in November, national gasoline prices fell to $3.08, near the lowest since 2021. This marked a ~60-cent decline in a matter of months as markets priced in upcoming policy changes. The prospect of geopolitical tensions declining also pressured prices.
President Trump’s plan is to get gasoline prices bac toward where they were in his first term. Prices averaged ~$2.57 per gallon in Trump’s first term comparted to ~$3.54 during Biden’s term. That’s a ~38% increase from Trump’s first term which put pressure on consumers.
In a study published by the Fed, they examined the impact of a $10 increase in oil prices. The increase raises Energy CPI by +2.3% over 2 quarters and then it remains relatively stable. Food CPI rises +0.3% and Core CPI rises +0.1% over the next 8 quarters.
Therefore, a $10 DECREASE in oil prices would LOWER inflation by 0.2%. While this alone would not solve the inflation crisis, it would certainly get things moving in the right direction. If oil prices could fall back to the $50 range, inflation could fall by ~50 basis points.
Lower energy prices are a great first step in obtaining lower inflation. However, lower energy prices alone are not enough to get inflation back to the Fed’s 2% target. The Fed’s job is far from over.
Source: TKL
