$0 oil? St. Louis Fed

Not quite… But the St. Louis Fed analyzed current inflation expectations in the marketplace and suggested that oil prices would need to trade down to zero (and below) for expectations to be realized… Here is their conclusion:

“According to our calculations, oil prices would need to fall to $0 per barrel by mid-2019 in order to validate current inflation expectations. After that, there is no oil price that would allow our model to predict a CPI path consistent with December 2015 breakeven inflation expectations. This implied path of oil prices is very different from the path of oil prices implied by futures contracts, which rises to more than $50 per barrel by mid-2019.

To be fair, they suggest some other possibilities:

“Expectations for the future growth of the other CPI components besides energy may be lower than the annual rate of 2.87 percent we assumed in our model.
The recent movements in breakeven inflation expectations may have been caused by something other than the decline in oil prices. It is even possible that a third variable is driving the decline in both.
Investors may expect the relationship between oil price and the CPI energy component to change in the future. (This would be despite the strong relationship seen over the past 20 years, shown in the second figure in our previous blog post.)
Changes in the inflation risk premium for bonds that are not inflation-protected and/or changes in the liquidity premium for TIPS may be distorting breakeven inflation expectations in the last few months.”

Here is the link:

https://www.stlouisfed.org/on-the-economy/2016/february/future-oil-price-consistent-inflation-expectations?&utm_source=Twitter&utm_medium=SM&utm_term=inflation&utm_content=oteblog&utm_campaign=2542