Tuesday, Apr 22, 2008
High oil prices don't cause long term inflation!
BoE: INFLATION AND THE GLOBAL ECONOMY
The adobe document is a speech by Timothy Besley of the MPC to the Canadians. It's a bit beyond me. I got bored at the point where they said high oil prices don't cause long term inflation! There are some other good points such as how they expect inflation to come down as the effect of increasing energy costs sort of vanish from CPI!. Anybody else want to read this and put up a sensible comment?
Posted by who stole my pension? @ 05:40 PM (443 views) Add Comment
11 Comments
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1. Bored@work said...
Strictly he's correct. Inflation is a measure of the rate of increase in price, not the actual price itself.
I know these aren't correct/current prices but I'll use round numbers to try to illuminate.
Lets say oil were $100/barrel. If oil goes up by $10 to $110/barrel, then we would have an increase of 10% (10/100 * 100)
So now oil is at $110. We get the same price rise of $10, so oil is now $120/barrel. It's percentage increase is 9.1% (10/110 * 100)
In effect, at higher prices the same nominal increase will result in a lower measure of inflation.
Lets fast forward a few years, so now oil is worth 10,000 dollars a barrel. Now the $10 rise is only a 0.1% increase (10/10,000 * 100)
By this stage, inflation has fallen off the scale, and will "Vanish from CPI". Indeed with higher costs, inflation can decline. The problem is, what happens in reality?
The assumption required above is that the nominal increase will remain static over time. Really, this is a steaming pile of bull.
In nearly all cases it is not the increase that is targeted by governments and banks, its the rate of increase.
So going back to the drawing board. Really what the government is aiming for is:
Oil is $100 a barrel. I order to keep the rate of increase at 2%, then the increase required is ((100 * 1.02) - 100) = $2
And if oil is $10,000 per barrel, then the allowable increase is: ((10,000 * 1.02) - 10,000) = $200
So the reality is that we can allow for ever increasing nominal increases in price in order to preserve "low inflation." Brilliant.
2. planning4acrash said...
Talk about a distorted statement of the bleeding obvious! High oil prices do not cause a rise in general inflation unless caused or accompanied by monetary expansion.
3. Greenbay said...
What its basicaly saying is house prices will rise 10% next year followed by 8% 2010 and 12% 2011..............
:-)
4. planning4acrash said...
Todays high oil prices partially reflect tight supply and demand, but that provides certainty to investors who view oil as a stable or store of wealth. They, as the Saudi's suggest, are responsible for much of the price rises, spending bernake's cash.
5. Dazednconfused said...
If money is too cheap you get inflation.
Christ, guys like this run the world....
6. planning4acrash said...
New money invested in oil 2 boost bank balance sheets flows into general price inflation with delayed effect as higher prices feed into margins through the supply chain. Over about 2yrs, which is why BOE targets inflation 2yrs hence.
7. harold said...
Besley's right! High oil prices don't cause inflation; they are a symptom of inflation. (He missed out the second bit of the picture - but then, he's not an economist, just a member of the MPC.)
8. plato said...
It's all bad news today ------ Dollar down, Oil up, Inflation rising, Rapid movements up and down. ----------- What a Chaotic World we are in !!!
Maybe tomorrow will be better.
9. bystander said...
"Inflation rising" @plato
.......but not, ofcourse in the UK, where everything is cheap, cheap, cheap, and when we have dropped interest rates to 3% or below, and flooded the financial systems and housing markets with liquidity, it will be even cheaper. O dear, I seem to have forgotten that sterling will be crawling along the bottom of the currency exchange pond, and the UK will have imported inflation beyond our wildest nightmares. Then what??????????????? Watched the shadow treasury secretary on the BBC stating that all GB and AD were doing was for votes, but that they need to formalise plans to save the housing market, response: pot, kettle, black, and WHY???????
10. paul said...
In other words, rising prices can be controlled if the money supply is increased to mask it.
REMEMBER the Bank of England has full control of the money supply. They create inflation and they take it away with interest rate sincreases. Or not, as the case may be.
11. planning4acrash said...
No Paul, rising money supply causes rising prices. The rise in price of a commodity does not cause general inflation, it would reduce the price of other things if money supply remained constant and demand would eventually drop for it, so the price rise could not be sustained. Listen to the media below to catch up on that.