This comes as the higher cost of energy finally makes its way into the monthly Consumer Price Index, with the Labor Department reporting that July’s CPI jumped .5%
Higher costs of energy IS NOT inflationary. It's contractionary.
The CPI is a collection of goods and services that we all pay for. Energy is but one component.
I somebody illustrate this point over the weekend. He said to imagine oil costing $500 a barrel. If oil cost $500 a barrel, consumers would have to spend most all of their money on energy. There'd be no money left to go shopping or out to dinner.
In that scenario, what would happen to the prices of other goods and services that make up the CPI? Prices would drop like a rock. Inventory would sit on store shelves. Restaurants would sit empty. Stores would cut prices to move goods. Restaurants would lower prices and have 2-for-1 specials just to get people in the doors.
Meanwhile, the economy is chugging along in the mid-3% GDP. The reason it's not higher is because of energy prices. If oil were $12 a barrel, like it was in 1998, folks would be spending less on energy and more on those other goods and services in the CPI.
You also have to remember what causes inflation. Increase in the money supply. Higher energy prices, and sending those dollars to OPEC, is not increasing the US money supply whatsoever. It's more like a tax on consumers. It's a drag on the economy. While it's hard for some folks to pay the energy bill, higher energy prices have probably kept the Fed from slamming the brakes on this current economic expansion.
Posted by muckdog at August 16, 2005 09:49 AM(er, above "I heard somebody")
Posted by muckdog at August 16, 2005 09:50 AMThanks for repeating your mantra over and over again Muck.
Posted by Steve Soto at August 16, 2005 10:08 AMThanks for repeating your mantra over and over again Muck.
Hey, sometimes you have to catapult the propaganda.
Posted by ann at August 16, 2005 10:14 AMYeah, the long term trend in energy prices won't be inflationary now just like it wasn't in the 70's.
Posted by cosmic muffin at August 16, 2005 10:35 AMThis Gallup indicates that a certain floor has been reached over the last three months. About 2/3 of those polled have felt the country is on the wrong track for a good while now (before the gas gouge started) and more than half don't like Bush(anymore). This shows me two things: one is that absent something big (indictment of Rove, f/i), the public line is pretty well drawn regarding high gas prices and high death in Iraq and long vacations for Bush. The second thing is that absent something big (?), Bush will never approach a solid 50-50 approval again, much less a majority. He is a lame duck, heading towards dead duckism. His point has been tipped.....not by a single malfeasance, buy by an entire presidency of failure. If a Democrat leadership/leader can emerge, the 06 elections are in play, big time. But what a big IF that is.
Posted by T2 at August 16, 2005 10:47 AMOne thing has changed from the 70's. Some friends and I were discussing energy prices last night and we noted that because of the trading of energy futures (thank you Enron) gas prices are hypersensitive now and change daily. Why do we need futures brokers in energy now? They were never needed before. Or is this new hand in the till just another wonderful creation of deregulation?
Posted by cosmic muffin at August 16, 2005 10:52 AMIsn't Muck's post the new version of the "energy prices aren't elastic" argument from the 70's?
Posted by idiosynchronic at August 16, 2005 11:25 AMCosmic, were you aware that when Cheney was working on his double-secret energy plan, Ken Lay contacted Paul O'Neill to request federal support for a derivatives trading market for fuels? It's just about helping the good 'ol boys who have money to gamble with do it legally through trading energy. If it hurts the consumer, what the heck, throw them a $300 refund to deal with the high energy prices!
Posted by ann at August 16, 2005 01:00 PMI just want to make sure new readers get the correct information. Higher oil prices are not inflationary. Anybody who says higher energy prices are inflationary, is wrong.
Posted by muckdog at August 16, 2005 02:20 PMOf course, you're right, absolutely. When energy prices rise and it costs more to produce goods and services thus forcing the producer to charge more for said goods and services, that's not inflation. Pay no attention to that man behind the curtain.
Posted by sf at August 16, 2005 02:36 PMsf, not only are you wrong, you're also incorrect! How are those companies you mention going to pass along price hikes to consumers, when consumers have less money to spend?
Posted by muckdog at August 16, 2005 02:47 PMann,
Thanks for the info. It disheartened me over the last 3+ years to see how a one time $300 rebate bought blind loyalty from people who should have known better. I gave up trying to explain to people how if Bush offers you $300 "over here", you're going to pay a lot more "somewhere else."
Well, now we know the name of at least one of those somewhere else places, the local GET YO GA$.
And it goes even futher for sf is correct, if oil prices stay high long enough it causes inflation, the cpi is starting to reflect that now. Even worse we are risking falling into 70's like stagflation as people must pay more for fuel and bare necessities, other sectors of the economy, especially those catering to moderate income consumers will decline.
We're in for an educational 3+ years, maybe our generation will learn that some things are worth a lot more than a $300 tax cut.
Posted by cosmic muffin at August 16, 2005 02:58 PMIf it costs a truck driver more to get milk to your store and they have to charge the store owner more for milk, you can be damned sure the store owner will pass that expense onto the consumer.
Posted by at August 16, 2005 03:02 PMno they won't, because the consumer will buy less milk. demand will slacken. supplies will increase. and prices will fall. or lots of milk will sit on the shelf and spoil.... grocers can't make money if they don't sell stuff...
Posted by muckdog at August 16, 2005 03:35 PMYou're right, of course. No energy is used to produce or ship products to market. What a moron. Prices are not based on strictly demand. They are based on production cost and profit. If the consumer can not afford said commodity, the prices don't go down, the merchant either quits selling said product or goes out of business. And yes, energy, especially petroleum, is used in virtually every product you can imagine.
Posted by sf at August 16, 2005 03:49 PMno they won't, because the consumer will buy less milk. demand will slacken. supplies will increase. and prices will fall. or lots of milk will sit on the shelf and spoil.... grocers can't make money if they don't sell stuff...
Muck, are you completely clueless. Milk is a basic necessity. People will not stop buying it. People will start cutting in other areas. Believe me, someone who cut her teeth in the retail business-there are many items that are not necessities. The market for a lot of soft and hard goods will collapse just like it did in the seventies. I lived through them. Obviously, you didn't.
Posted by Ga6thDem at August 16, 2005 04:28 PMWell stop the arm waiving and prove it.
Here's my proof.
From the headlines
''new-car prices fell by the biggest amount in 30 years, and outside of food and energy, prices remained well-behaved. ''
Oil prices have gone from $12 to $66 a barrel the past seven years, and the core rate of inflation is tame.
Posted by muckdog at August 16, 2005 04:43 PMYes, and for most of those seven years oil prices were stable, under 30 dollars a barrel. You will begin to see the effects of higher energy costs very shortly. In fact, you already have, in the CPI, which if you may recall, was the original point of this post.
Posted by sf at August 16, 2005 05:00 PMNew cars? Well, that proves my point muck. People are cutting back-buying used cars or fixing the ones that they have. Interesting that figure is exactly 30 years ago. Let's see-that would be 1975 huh? Food prices shot up? Of course, food is heavily dependent on truck transportation. Soft and hard good price increases won't be seen yet. It will take a few months for their transporation costs to show up in the inflation index.
A course in macro and micro economics in college and real life experiences beat partisan hacks like kudlow who propose whack a doodle economic theory aka voodoo economics. Try it sometime!
Posted by Ga6thDem at August 16, 2005 05:08 PMHere's my proof.
''new-car prices fell by the biggest amount in 30 years, and outside of food and energy, prices remained well-behaved. ''
Oil prices have gone from $12 to $66 a barrel the past seven years, and the core rate of inflation is tame. Posted by muckdog
New car prices fell because of huge discounts offered by car companies only because their vehicles were not selling otherwise. Oil prices have held steady in the $12 - $30 range for the past 6 years. The rise to $60+ has been in the last few months. You will find those higher energy prices being passed on to consumers as higher prices or surcharges. Food depends on transportation which is effected by oil price. That is inflationary. You are delusional.
If the price of milk went up and I had a choice of whether to buy gasoline or milk.....I'd buy milk. 2% milk, btw, and just enough for my raisin bran every morning.
Posted by at August 16, 2005 06:27 PMno they won't, because the consumer will buy less milk. demand will slacken. supplies will increase. and prices will fall.
So, given gas prices today, consumers will stop buying gas and the prices will drop. Right, muck? I mean, if milk prices go up because of oil prices and people stop buying milk, it stands to reason that consumers will stop buying gas. Supplies will increase and proces will fall.
Posted by ann at August 16, 2005 06:54 PMyou still haven't offered any proof. ii'm still waiting ...
Posted by muckdog at August 16, 2005 10:46 PMBut so-called core inflation, which strips out volatile food and energy items, inched up just 0.1 percent for a third straight month -- less than the 0.2 percent climb economists had anticipated.
Over the past 12 months, this closely watched measure of consumer prices has risen a moderate 2.1 percent.
"There is still no inflation out there," said economist David Wyss of Standard and Poor's Ratings Service in New York.
Oh, I get it....we simply remove those things that actually effect consumers from the equation so we can say there's no inflationary impact. Sort of fuzzy thinking, but....whatever. The reality is that food and gas prices directly impact consumers, regardless of whether some bean counter in DC wants to include them or not. Basicaly, the equation used is simply a PR mask and bears little reality to what people are actually feeling.
Posted by at August 17, 2005 06:18 AMHere it is:
The speech where Bush links high taxes to high energy prices.
Posted by ann at August 17, 2005 12:38 PMWarm up that happy meal - I'm getting hungry!
Posted by pessimist at August 17, 2005 01:46 PMI see Muckdog finally admits that energy prices are inflationary, since he has to strip them out of the price index to support his otherwise weak argument. I suppose he'll retaliate with his when prices go up, they actually go down argument.
Posted by sf at August 17, 2005 02:23 PMMuck's theory reminds me of the military trying to meet their recruitment goals: change the target when you know you aren't going to hit goal.
Posted by ann at August 17, 2005 03:01 PMTrust me, the Big Guy's (not me, but thanks) approval ratings will soar after October. Of course, it won't be because of anything HE did, the lucky stiff. Why the new support? Sorry, classified. [I know something you don't know...]
Posted by DC at August 17, 2005 07:01 PM