"..Conventional wisdom is that the dramatic reduction in fuel prices acts like tax cut for consumers and thus tends to increase economic activity. This would tend to make it more likely that the Federal Reserve would raise interest rates. Clearly the decline in oil prices reduces the headline inflation numbers. However, most believe that the Federal Reserve concentrates more on the various core inflation metrics. These are computed ex-food and ex-energy.

While it is certainly true that lower oil prices give consumers more spending power, there are some offsets to the increased economic activity due to lower . Most are aware that capital spending by oil drillers has been cut back in response to the decline in oil prices. Some people employed in drilling and oil services have lost their jobs. What has not gotten much attention is the decline in incomes that the lower oil prices have entailed.

Every barrel of the nine million barrels per day produce in the USA, which is about 2.2 billion barrels per year, ultimately results in payments to Americans. Individuals own land on which they receive royalty payments based on the proceeds of the sale of oil produced by wells on that property. Many Americans own shares in royalty trusts whose income also is reduced as the price of oil declines. Even those who do not directly own oil leases or wells may own shares in corporations that do own wells or leases and essentially suffer the same proportional decline in income or wealth as a result of the decline in oil prices. Every dollar in decline in oil prices ultimately reduces the income of some American by about $2.2 billion. Also, various state and local governments receive severance taxes based on the price of oil produced in their jurisdictions. The $45 per barrel decline oil prices reduces incomes of Americans by $100 billion at an annual rate. That does not count any lost income by employees in the oil and related industries.

Lower oil prices could also lessen demand for some new aircraft and vehicles whose main attraction is that they are fuel efficient. The apartment building that I live in just spent about $6 million to install co-generation equipment that will allow the building to switch from heating oil to natural gas for heating and hot water which made much more economic sense when oil prices were at $100 per barrel than the current $55 per barrel.

The impact on inflation due to lower fuel prices in not entirely restricted to the core inflation numbers. Various wage, pension and similar payments are based on the headline consumer price index. To the extent that lower fuel prices reduces the consumer price index, that would lower those payments. Likewise, even wages that are not explicitly indexed to the consumer price index may be effected by lower fuel prices as wage demands could be lessened by lower costs of living.

Lower fuel costs can also be passed through to prices that are inside the core ex-food and ex-energy area. Transportation cost are a prime example. Airfares and other transportation costs such a bus, train and water travel have fuel as a large component of their costs. Lower transportation costs can indirectly lower other prices. For example if a good now costs $100 in one city and $95 in another city a certain distance away and it now costs $5 to transport the good from one city to the other, those prices can prevail. However, if the cost of shipping the good from one city to the other falls to $4, the price in the high cost city should fall to $99. .."

http://seekingalpha.com/article/2770845