Higher Oil Prices Mean Tighter Budgets, Higher Inflation, Hartford Says

Higher employment will boost consumer spending in near term, but consumers still struggle with excessive debt

While economic data continues to signal a recovery that is “gaining strength,” significantly higher oil prices due to the turmoil in the Middle East “threatens to erase much of those gains,” according to Hartford Investment Management’s March economic outlook.

Higher energy costs will “likely squeeze business margins and household budgets,” according to Hartford Investment, a subsidiary of The Hartford Financial Services Group.

As for the housing sector, Hartford notes that while low mortgage interest rates continue to provide “attractive” financing alternatives, high unemployment—although it’s improving--and a “significant supply overhang” due to excess new home construction, foreclosed homes, and delinquent homes that will likely be foreclosed, will keep home values “depressed for an extended period of time.” Hartford says it also estimates there will be an additional 5% to 10% decline in home prices over the next 12 months.

Employment growth, however, appears to be on the “verge of an important reversal,” Hartford Investment professionals say, with the unemployment rate “moving in lock-step” with jobless claims. “We expect the employment data to begin confirming the strength we are seeing elsewhere in the economy and will likely provide support for a further pickup in demand,” the Hartford report states.  

Increasing employment along with “positive wealth created by rising equity values,” will support consumer spending in the near term. However, the report notes that households will continue to struggle with “excessive debt burdens” that will need to be tackled through a combination of higher savings and “deleveraging.”

Higher inflation is also on the horizon, the Hartford report states. “Over the last six months headline CPI inflation figures have been driven up by higher food and energy prices, while the core measure of CPI has climbed much more slowly,” the report states. “With rising tensions in the Middle East pushing oil prices higher, we expect to see headline CPI inflation approach the Federal Reserve’s 2% target by mid-year and on its way to 2.0%-2.50% by year-end.”

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