Payden & Rygel: US oil consumption per unit of real output
The conflict in the Middle East reignited fears of a recession, a pickup in inflation, or both, driven by an 'oil price shock'. However, we would caution against being overly pessimistic on growth or too worried about an inflation pickup.
First, the pass-through of higher oil prices to core inflation has been limited in recent decades. Second, while higher energy prices will eat into consumer income, it will take sustained elevated energy prices to further erode income growth (e.g. more than a quarter).
Third, the US economy's oil intensity has fallen by 66% since1965, driven by diversification into other energy sources and a shift from manufacturing to services. Fourth, the US recently transformed from a net petroleum importer to a net petroleum exporter, further insulating the country against oil price shocks.
Perhaps the transmission from oil price shocks to growth and inflation is weaker today than ever, at least for the U.S.