Iran Agreement Means Less Inflation, Higher Growth

Although economists haven’t yet begun to crunch the numbers, Iran’s agreement not to produce atomic weapons or weapon-grade plutonium for at least 10 years will result in increased oil production and lower oil prices, thus keeping inflation in check and interest rates at their current lows for some time to come, if not years.

This is if Congress approves the deal, of course. But lifting the economic sanctions will enable Iran to begin to sell its oil internationally sometime next year, into a world already flooded with oil products, though there is some uncertainty when it will happen.

Barron’s, for instance, believes it will happen slowly, which might not affect oil prices in the short term, at least. When and if sanctions are lifted, Iran’s oil production has to be ramped up, facilities upgraded, so that its products will only gradually reach international markets.

Graph: TradingEconomics

This is while US retail inflation via the Consumer Price Index is already zero–i.e., retail prices aren’t rising at all. So it will give Janet Yellen’s Federal Reserve room to keep interest rates lower longer, thus boosting consumer spending as well as the housing market, which is beginning to show more robust growth with builder confidence at its strongest level since 2005.

It will also boost consumer incomes, which are already profiting from the low interest rate environment that has reduced borrowing costs for consumers. Real (after inflation) consumer incomes are now rising at 4 percent.

Wages salaries rose 0.5 percent in May. Both proprietors’ income and rental income show especially strong gains. This in turn is boosting consumer spirits, with both the Conference Board and U. of Michigan surveys now above pre-recession levels.

Graph: Econoday

Optimism in the consumer sentiment report from the University of Michigan is as strong as it can get, according to Econoday. The overall index is up sharply this month and well beyond Econoday’s high-end forecast. But the report’s expectations component, reflecting strong optimism for the jobs market, is an absolute standout at 97.8 for a 12-year high and a 13.6 point surge from May. The 13.6 point spread is the largest monthly gain since March 1991 (that’s right, 1991).

There is a downside to the agreement, of course. Russia and China will benefit from doing more business with Iran, and Iran could backslide on the agreement. But there is general agreement that the Iran deal will boost growth throughout developed countries, with consumer-drive economies that require lower inflation and cheap energy to boost sustainable economic growth.

Harlan Green © 2015

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