New Fed fear: Lower oil

Falling oil prices may not curb inflation but could spur growth, taking Fed rate cuts off the table.

NEW YORK (CNNMoney.com) — The drop in oil prices to the lowest level in 20 months has boosted some investors’ hopes that a key ingredient of inflation is out the door, which has helped open the back door for lower interest rates.

That’s one of the reasons that a surprising jump in a key gauge of wholesale inflation Wednesday caused so little stir in financial markets the day before the Consumer Price Index, the government’s main inflation gauge, is due to be released. Wednesday’ report on wholesale inflation came the same day that oil dipped near $50 a barrel – down some 35 percent from its record highs hit last summer and the lowest point seen since May 2005.

But the inflation hawks at the Federal Reserve aren’t likely to drop their guards – or interest rates – just because $40-something oil might now seem be in reach.

Some economists even argue that the Fed will have to be even more vigilant for inflation pressures now that oil is falling. That’s because lower oil prices could actually give a boost to consumer spending and the economy, which flagged in the second half of last year under the weight of higher oil prices and the series of rate hikes from the Fed that ended last summer.

CNN/Money