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LARRY KUDLOW: This is why energy has such a huge impact on inflation

The Federal Reserve meeting is being held today and tomorrow, with an FOMC announcement followed by the usual Jay Powell press conference slated for tomorrow afternoon, I guess at 2:30. 

For all you Fed watchers out there, and others concerned about your stock market portfolio, the Fed’s got a brand-new challenge. It’s called $100 oil. Good story on the front page of The Wall Street Journal website on this — all about Saudi and Russia production cuts, and yes, the Fed’s going to hold their interest rate target steady tomorrow. I guess everybody thinks that, but several analysts think world oil is understocked by several million barrels a day at least.  

Going beyond the Journal’s oil story, Joe Biden has essentially frozen drilling in Alaska and big chunks of the Gulf of Mexico and is closing down oil and gas exploration in the great state of New Mexico. I believe we got that news today, didn’t we, which happens to be the home of the Interior Secretary, Deb Haaland, who is a Native American who insists on going against most of the tribes in New Mexico where so many other Native Americans would love to have high-paying jobs in the oil fields.

In other words, OPEC+ whacks the U.S. on the head by cutting back on production — please, don’t forget that includes Iran and Venezuela along with Russia and the Saudis — and Joe Biden’s response is to slam down current and future production here in the U.S. in tandem with our adversaries.   

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Sheer insanity! Totally giving up our energy independence. Wasting away the progress of the Trump years. We’re not quite to $100 oil yet, but we’re gaining on it, and with today’s quote for Brent crude around $95, and West Texas around $91. Following world wholesale prices going up, nationwide AAA retail gasoline at the pump has climbed all the way back to $3.88. Year-end last December it was around $3.30.   

You can also note that since Joe Biden took office, based on February 2021, gasoline is up over 50%. How about that? In the last couple of months, the topline CPI inflation rate ended its 12-month slide and is now beginning to rise again. A big reason is energy, and that reason is likely to continue. Now, here’s what the Fed has to contend with. I’ve said this before, but not for a while.   

So, let me repeat: Refined petroleum products permeate the entire economy. That’s why energy has such a huge impact on inflation. It’s easy for economic eggheads to exclude food and energy from the prevailing inflation, but that’s a misnomer. It’s a big mistake. Know what requires fossil fuels? Are you ready for this? I haven’t done this list in a while. Fasten your seatbelts. 

Chewing gum, golf balls, golf bags, shampoo, shaving cream, phones, clothes, toothpaste, asphalt, trash bags, laptops… Hang on, I’m just getting warmed up here. Don’t forget diapers, pacifiers and toys used by parents and babies around the world that are all made with oil or natural gas or both, but hang on a second!   

In hospital operating rooms that keep us healthy, fossil fuels are used in life-saving products and equipment like pacemakers, MRI machines, IV bags, tubes, surgical instruments, monitors, stethoscopes. I’m not done yet! Also: fossils are critical to prosthetics, hearing aids, glasses, contact lenses, but hang on! Chemicals derived from petroleum also help make soaps, antiseptics, aspirin, life-saving pharmaceuticals used by emergency care doctors and physicians.    

By the way, don’t forget fertilizer, which of course impacts food prices, which is, of course, yet another pocketbook, kitchen-table issue. There’s a reason former President Trump calls oil and gas “liquid gold.” It is incredibly important to every nook and cranny of our economy and because of Mr. Biden’s Bidenomics, which wages continuous war on fossil fuels, the likelihood is energy prices are going to continue to rise right into the next recession.   

The Federal Reserve is going to have to do something about energy-related inflation before the next recession. That’s the Fed’s $100 challenge and that’s my riff.   

This article is adapted from Larry Kudlow’s opening commentary on the September 19, 2023 edition of “Kudlow.” 

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