Lower oil prices should provide a modest offset, boosting consumers’ discretionary spending power. Our commodities team expects WTI crude to average $35/bbl over 2009 − lower than today’s $40/bbl − while recovery will lift quotes back to $55/bbl in 2010 (see Global Oil Outlook – 2009: The Global Engine, Stalled and Flooded, February 2, 2009). Lower oil prices are only one factor behind the plunge in inflation. The deepening downturn has intensified the risk of deflation, as rising economic slack increases the prospective US output gap to more than 7%. Slack overseas will put downward pressure on import prices, and the dollar has strengthened. We think aggressive monetary policy, a global rebound, and increased commodity prices will prevent US inflation from slipping below zero − but the risks, especially over the next year, are tilted toward lower inflation.Morgan Stanley - Global Economic Forum
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