If anyone wonders if Bob Brinker reads the blogs and message boards that are critical of some of what he says, yesterday's complete about face where he correctly stated the FOMC could raise rates to lower the impact of higher price oil on inflation should end all doubts. This is what I've been posting for some time to those who have said Brinker is right that higher priced oil is not inflationary.
My Friday article "Bob Brinker WRONG about Oil Prices and Inflation"
Brinker also correctly said that it is hard to lower the demand for oil by raising rates because much of the new demand comes from China and India. We can slow their demand for oil by killing demand in the US , their big customer, via a recession or slowing growth to just above zero but those economies will still want to grow as they embrace capitalism.
About the only thing he held on to from his past incorrect statements about oil not being inflationary was saying "core inflation is up a small 1.9% despite huge gains in oil prices." This is not "small" and is at the upper end of the Fed's acceptable range of 1 to 2%. It was higher at 2.9% earlier this year but when core inflation fell to under 2%, the FOMC started cutting rates. Given the collapse in the housing market, if not for inflation from higher priced oil and other commodities, we might be worried about a dangerous deflationary spiral from falling housing prices and repriced SIVs (note #1).
Bob Brinker made a lot of good comments about how we wasted our opportunity to get off Middle East oil after the 1974 embargo. His guest, an auto writer emeritus from Forbes, said America is a bunch of fat people who want and need big, comfortable cars to drive to their $100,000 jobs and the current price of oil is not a big deal relative to being comfortable. He also said this was true in Europe too where rich Germans love their big, powerful cars. (just look at the big, powerful, heavy Audi's, BMW's and Mercedes with 8 cylinder engines. ) The guest also said he believes gasoline will have to get to about $7 per gallon before Americans make significant changes in driving habits.
Notes:
- SIV is "Structured Investment Vehicle." Here is a good article on SIVs called "Shedding Light on SIVs"
Good post, Kirk. I've often wondered what was so special about rising oil prices as a restraint to inflation. I wondered why you couldn't say the same thing about rising food prices, or any consumer necessity. It didn't make sense to me and I am glad to see I wasn't crazy.
ReplyDeleteThe only thing I disagree with in your post is your remark about a "dangerous deflationary spiral". Personally, I do not think it is dangerous; in fact it is required to rebalance prices and finally hit a bottom. It's just part of the normal economic cycle, or it would be, if the fed would stop trying to inflate our way out of deflationary periods.
I think what Bob is implying is the difference between cost-push and demand-pull inflation.
ReplyDeleteBob pretty much holds to the academic macroeconomic view. I don't agree with him on a lot of it, but I tend to agree here.
Why I can agree with his conclusion and not with his reasoning is because he and I end up at the same place. It also depends on what you define as "inflation" and "inflationary."
To me, all inflation over the long-term is due to monetary expansion. Bob has said before that as long as energy price increases aren't "monetized" by the Fed, then they won't be inflationary. I agree here. If the monetary base isn't expanded, then there is no inflation. Money must be shifted from one purchase over to food and energy, but overall spending doesn't rise.
Bob is also focused on the type of inflation that will cause a downturn. I hate all inflation, including "low" 2% core and whatever headline. Inflation is always a tax on savers and funnels money to the connected. But, I agree that a low constant rate will not cause the type of positive feedback loop that will result in a downturn. This is because people can plan for a small constant rate. In fact, people plan for 2% inflation, expect a 2% raise, which causes 2% inflation, etc. etc.
So, in the sense that energy price rises are inflationary, yes and no.
Thanks for your comments but it seems you missed the part where I said Brinker has done an about face and now correctly states the direct link between higher prices and inflation.
ReplyDelete"It also depends on what you define as "inflation" and "inflationary." "
There is no need to make up new definitions for ones that have worked quite well and most people understand.
Inflation is higher prices for the basket of goods used for the CPI.
Inflationary means one of the items in that basket goes up be it gasoline, food or your rent.
This "switching to lower priced goods or not buying something" is what causes the "taxing effect" on higher energy prices. The reason it is a "taxing effect" is many of us can afford the higher prices for energy so we just spend more. As long as one person can afford to pay the higher prices without having to cut spending elsewhere, then you get higher inflation. If everyone can afford to pay the higher prices, then there would be no "taxing effect."
"Bob has said before that as long as energy price increases aren't "monetized" by the Fed, then they won't be inflationary."
He was partially wrong. Rich people don't care how much the Fed raises rates to prevent "monetization." In fact, rich people with the majority of assets in fixed income like higher rates so they will have more dollars to spend if the FOMC raises rates. I've already explained that as long as they can afford to pay the higher prices without cutting spending elsewhere, then there will be "some" inflation from the higher prices.
From what Brinker said the last time he was on the air, I think he understands this now.
EXCELLENT point by Andrew: big difference between monetary devaluation caused inflation and demand caused inflation. With demand, only certain items increase in price and others get cheaper since the money supply remains the same. $$ devaluation = higher prices for EVERYTHING if your incomes do not keep pace!
ReplyDeleteI gotta disagree partially with Kirk, one is bad for the long term and the other (if govt doesnt restrain the markets) is temporary and fixed by increased supply. In the case of energy supply, it is currently restrained by govt or we would have for example, more oil drilling and nuke plants.
Inflation is both good and bad (if controlled and all bad if out of control).
Bad for those holding cash or incomes that do not pace inflation, and for consumers.
Neutral for those holding real assets that generally pace inflation.
Good for those with lots of debt, the debt is devalued and it gets easier to pay it off (which is why the govt actually favors controlled inflation).
Deflation is mostly good.
Neutral for those holding real assets that will pace the deflation.
Good for consumers who get lower prices.
Bad for those with high debt, having to pay it with more costly $s.
No doubt, higher oil costs, raise prices for everything in the economic chain and, until supply corrects, would constrict an economy with stable money supply. But not in the USA, money supply was increased so prices will go up unrestrained.
I prove my point by looking at the cost of oil in other currencies which have risen vs. the $, you will see that oil prices have risen relatively little outside the US !!!
"I gotta disagree partially with Kirk, one is bad for the long term and the other (if govt doesnt restrain the markets) is temporary and fixed by increased supply. In the case of energy supply, it is currently restrained by govt or we would have for example, more oil drilling and nuke plants."
ReplyDeleteGood point and I admit I was using a bit of hyperbole and gross over simplification to when I said rich people don't care if there is some inflation since they get more for their assets in fixed income. I was trying to make it easy to see that for some, higher prices for oil are easily paid thus there is no reduction in spending elsewhere which is required to net zero inflation or a "100% taxing effect" of rising energy prices.
"I prove my point by looking at the cost of oil in other currencies which have risen vs. the $, you will see that oil prices have risen relatively little outside the US !!!"
I think most of the incremental demand is from India and China. Last I looked, the currency in China is tightly linked to the US dollar which has some upset. Bottom line is there is significant inflation in China due to rising energy prices.