Oil prices will have to stabilize before inflation will grow to 2%, but with oil prices continuing to fall, reaching the Federal Open Market Committee's 2% target may take longer than expected, Federal Reserve Bank of St. Louis President James Bullard said Thursday.
"Headline inflation will return to target once oil prices stabilize, but recent further declines in global oil prices are calling into question when such a stabilization may occur," Bullard told the Economic Club of Memphis, according to text released by the Fed.
Lower oil costs could also drop inflation expectations. "Inflation expectations in the U.S. may be falling. If so, this would put downward pressure on inflation," he said.
But low oil prices are "likely a bullish factor" for the economy, he said, noting real personal consumption expenditures growth.
Spikes or large declines in crude oil prices "can substantially influence headline inflation," Bullard said, adding that when prices stabilize the influence abates quickly. "The fall in crude oil prices to lower levels, even if maintained indefinitely, has only a one-time influence on the year-over-year inflation rate," he said.
"I have argued that market-based measures of inflation expectations have been unduly influenced by the large movements in crude oil prices," Bullard said. "Nevertheless, with renewed declines in crude oil prices in recent weeks, the associated decline in market-based inflation expectations measures is becoming worrisome."
