Will An Oil Price Fall Push Inflation Down?
From the speeches of Fed officials, you might conclude that the Fed has absolutely nothing to do with inflation. You might think they had never heard of a theory that suggests that monetary policy has an impact on prices. Rather, they seem to suggest, inflation is something visited upon us by dramatic price movements in important commodities, which in turn are dictated by world events or sudden and inexplicable changes in demand and supply.
This peculiar mix-up of cause and effect has nothing to do with reality. It is a myth that price inflation is somehow led around by the nose by major sectors such as energy and has nothing to do with the money stock. Further, it is not the case that consumers are nothing but passive players in this drama, accepting whatever prices they are given. FULL ARTICLE
Comments (9)
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["... Likewise, our monetary analysis indicates that the growth momentum of the overall CPI is also likely to stay elevated throughout next year.."]
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What does that statement mean ?
What exactly do the terms "growth momentum", "overall CPI" and "stay elevated" mean ?
Can the author state a numerical estimate of next year's U.S. annual inflation rate, via his monetary-analysis ?
What is the 'actual' rate of current U.S. inflation, as calculated by the author's monetary-analysis ?
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Published: September 21, 2006 8:24 AM
"If our forecast is valid, we suspect that the Fed is unlikely to lower its fed funds rate target even if the pace of economic activity were to slow down quite visibly. Remember, according to Fed's officials their main priority is keeping the rate of price inflation in the acceptable range."
I assume I am not the only one who believes, despite what the Fed tells us, its main priority is NOT controlling inflation.
Published: September 21, 2006 10:06 AM
Thanks for the great analysis! Based on the last chart, and the 36 month lag, we should have expected the current slowdown in the economy as a result of the drop in Fed credit in 2003. I suspect we'll soon learn that we're in a recession now.
Mainstream economists seem to view inflation as an act of nature, like hurricanes. Is that a result of Keynes/neo-Keynes or something newer?
Published: September 21, 2006 10:25 AM
(Somewhat) a propos of this article,I read that Hayek and other Austrians believe that prices in the resource sector respond sooner and in a more pronounced way to monetary inflation than do lower order goods.My intuition tells me that this makes sense, but I can't quite articulate the reasons why,can anyone can explain or point me to an appropriate article?
Published: September 21, 2006 12:23 PM
The issue of the influence of oil prices (or for that matter any class of prices) on the level of price inflation causes me to recall the late 1970s. (Unfortunately, I am old enough to remember that period.) Although I am in fundamental disagreement with him regarding several important monetary issues, I believe Milton Friedman used the following example to illustrate the fallacy of claiming that the large increases in the price of oil were the major cause of the 1970’s price inflation: The United Kingdom, despite possessing large North Sea oil resources, had considerable price inflation during this period, while Switzerland, with virtually no oil, had much lower price inflation. The reason for the much higher price inflation in the U.K. is that the U.K. pursued a much more expansionary monetary policy than that pursued by Switzerland.
Published: September 21, 2006 1:57 PM
Mikey,
It's a question I've had for a while too, and have yet to find an explicit answer. The best I can come up with is that the effects of inflation will follow the same path the new money does.
So, under inflation generated through central bank policies, which create new money through new loans, one would expect to see the first signs of inflation in those sectors that are heavily intertwined with banking. With the prevalance of trading "on the margin" and leveraged buying, stocks would be one area. And of course, housing, with its current dependence on mortgages, would be another. As far as oil, I think we see the inflation there because the Asians we're selling our dollars to use those dollars to buy mostly oil right now.
Furthermore, the current set-up is somewhat skewed to these markets as they are markets that involve a relatively low percentage of labor costs, or, labor costs that can't be outsourced to repressed labor pools in foreign countries.
Again, this is just my thought, as I haven't found an explicit answer anywhere either.
Published: September 21, 2006 2:15 PM
The high price of oil indicates (excluding inflationary affects) a certain amount of scarcity for that good. It is impossible to tell how much is due to printing money or scarcity, but a significant portion has to do with scarcity.
All this means is that the most abundant, cheap energy source is scarcer now than before. Most activities humans do involves the consumption of some form of energy, hence, less energy available->less stuff to do.
The inflation part just screws people over as many previous posters have already suggested.
Published: September 21, 2006 5:36 PM
Sir,
As we know the inflation can be either demand or supply sided. The the recent spurt in oil prices had fueled the CPI in most countries including US. Though the latest figures show that the cpi (General) has softened, core CPI is still high (on yoy) basis and constant (on month on month basis). I reckon it is partial to 'blame' oil prices as the cause of inflation as we don't know the the level of money supply in the economy (Fed has stopped providing M3 (broad money) since Feb'06.
Published: September 27, 2006 4:49 AM
"(Somewhat) a propos of this article,I read that Hayek and other Austrians believe that prices in the resource sector respond sooner and in a more pronounced way to monetary inflation than do lower order goods."--good question me thinks...
I guess the first thing to mention is the way supply and demand works through the supply chain. The demand curve cascades down through the highest order good (ie electricity) down to the lowest order good (say, oil). Supply curve cascades in the oppositte direction.
Since demand and supply are measured in dollars, when dollars are printed they are usually spent by consumers or the government on higher order goods (final goods). That money trickles down the supply chain until it reaches the lower goods; at each step in the chain the demand curve is shifted to reflect artificially high demand. Prices, naturally, go up driving companies to invest capital in expanding output. Supply curve shifts (hopefully).
I guess the bust comes after all these companies respond to fake demand and expand operations using low cost capital (low interest rates). The higher end users carry a lot of debt from the low interest rates and can no longer support the debt -> bust. Companies can't sell goods (made too many). Bust. Demand curves shift backwards from which they came.
Published: September 27, 2006 5:50 AM