Will Inflation Come Roaring Back? All Eyes On China As Oil Prices Reach 7 Week Highs

Gasoline prices have started to rise again after falling from a record high in 2022. Additionally, oil prices were up by roughly 1% on Monday to a seven-week-high, driven by China's expected economic recovery this year. The prospect of growing Chinese demand for oil is amplifying investor concerns that the deflation streak may come to an end.

What Happened: The latest CPI data issued by the Bureau of Labor Statistics showed the drop in the price of gasoline in December was the largest contributor to the overall decrease in the monthly all-items index. The lower cost of gas even offset the increases in the shelter indexes, resulting in an overall decrease in the CPI.

With gasoline and oil prices on the rise, this trend may not continue in the coming months.

Those rising energy costs have some investors concerned that the next CPI report, due out in February, may show an increase in overall inflation. This could result in hawkish Federal Reserve commentary, leading to a potential market sell-off, which would reduce some of the over 5% gains the SPDR S&P 500 SPY has made so far this year.

Read also: Don't Call It A Comeback: Cathie Wood Is Beating The S&P 500 In Early 2023

Why It Matters: While oil is volatile right now, the Energy Information Administration (EIA) predicts Brent crude oil will average $83 per barrel in 2023, down 18% from 2022, and continue to fall to $78 per barrel in 2024 as global oil inventories build, putting downward pressure on crude oil prices.

The EIA also forecasts U.S. gasoline refining margins will fall by 29% in 2023 and drop by 14% in 2024, leading to retail gasoline prices averaging around $3.30 per gallon in 2023 and $3.10 per gallon in 2024.

Now Read: JPMorgan Strategists Now See Lower Odds Of Recession, But Economists Disagree 

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