CPI Inflation is higher by an additional 0.5 percentage points in 1999, reflecting higher prices for oil and other energy commodities. In 2000, higher prices paid for energy will cycle through the economy and create additional inflationary pressure and CPI inflation is higher by approximately 0.75 percentage points. GDP growth is also affected. For 1999, the growth rate of GDP under the high world oil price case is approximately 0.5 percentage points lower, and in 2000, the reduction in growth is approximately a full percentage point. The current economy is robust, growing at more that 4 percent per year.
Volatility matters for all consumers and producers in the economy.
Business firms, both energy and non-energy, make investment decisions based on expectations about prices. Even those firms that expect volatility may be adversely affected by simply putting off a decision until the market is more stable. Consumers purchases of housing and consumer durables, such as autos and appliances, are also affected by instability in energy markets. The economy would most likely be better off with stable energy prices, than one with fluctuating oil prices, even if the average is the same over the same period.