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A recent report from Citibank indicates that oil prices may experience a significant drop in the second half of 2025, with expectations of a decline to around $60 per barrel. Analysts at the bank believe that this drop will have a substantial impact on inflation in the United States.
If this scenario comes to fruition, reaching the Federal Reserve’s inflation target of 2% may require a further decrease in oil prices to $53 per barrel, which would reduce gasoline prices to approximately $2.60 per gallon. This decline will also indirectly affect food prices and core inflation over the next two years.
Eric Lee, a strategic analyst at Citibank, mentioned that the price of Brent crude could drop by 20% from its current level of about $75 per barrel, reaching $60 per barrel. He explained that such a drop could lead to an overall reduction in inflation in the U.S. by 0.15% if oil prices decline by 10%, while it could fall by 0.3 percentage points if prices drop by 20% in the short term.
This decrease would also have an additional impact on food prices, potentially lowering inflation by 0.08 percentage points, and could reduce core inflation by 0.16% over the next two years.
In the event of a 33% drop in oil prices, inflation is expected to decrease by 0.5% immediately, while a further drop to $35 per barrel could cut inflation by 0.8%, leading to a broader impact on the U.S. economy.
It is worth noting that Citibank clarified that oil prices account for about 80% of wholesale gasoline costs and around 50% of gasoline prices at retail stations. However, price fluctuations do not directly reflect on final prices due to other factors, such as refining margins, distribution costs, and taxes. Gasoline represents about 3% of the overall inflation index, while energy accounts for around 6%, and food makes up 14%. Core inflation, which excludes food and energy, constitutes about 80% of the total index.