Cheap Oil Also Pressures Central Banks

Ever since the oil shock of the early 1970s, central bankers have fretted that rising energy prices spelled recession.

Now they’re discovering cheaper energy can be a headache too, especially when warding off deflation is the economic challenge du jour.

Historically, the 27 percent drop in Brent crude from its June peak to its lowest in four years would have been a reason for happiness among policy makers. It makes it cheaper for companies to churn out everything from cars to toys and for consumers to fill their tanks, spurring demand.

A study published in August by the Federal Reserve calculated rising oil prices explained a 5 percent reduction in the size of the U.S. economy during the recent financial crisis.

So what could be wrong now? More than almost ever, central banks are as worried about low inflation as weak growth. What they’re working against is a deflationary spiral that will drive up debt burdens and derail demand as businesses and households retrench in anticipation of even lower prices.

via Bloomberg

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