Gas Prices Start to Bite

The price of gasoline in the US has risen 60% in the last year, 14 cents in the last two weeks. While Yanks pay a fraction of the price drivers elsewhere must fork over to fill up, the sudden increase is forcing a reassessment of the family budget and driving habits. The Butterfly Effect here is a general slowdown in the economy with continuing rising prices – the seeds of stagflation have been sown, and one can only hope they don’t sprout.

Thanks to the rise in gas prices, the Consumer Price Index came out earlier this week with a 0.5% increase and the Producer Price Index (which is a better leading indicator) was up 1.0%. Stripping out volatile energy and food costs gives a core rate increase of 0.1% on the CPI and 0.4% on the PPI – economists say this gives a more representative view of inflation throughout the economy. The problem is that most people have to buy energy and food every month, so stripping those out doesn’t really give an accurate picture of what the average family faces.

The Kensington Review is on record as saying the US needs to run a slightly higher rate of inflation that the Federal Reserves wants. In times of war, and especially terror that may hit Wall Street very directly, an economy that is running a bit hot gives more wiggle room if things go awry. It’s rather like a skier coming into a rise – a faster-than-usual pace going into the climb means less work getting through it. Regular old demand-pull inflation, when there is too much money chasing too few goods, is one thing. But inflation derived solely from rising oil prices is a different beast.

Oil-based inflation, where there is too much money going to buy one commodity and thereby reducing spending on others, represents a disruptive shift in spending patterns. The result is not everyone raising prices, but of less disposable income for things other than oil resulting in weak demand across the economy. Suppliers of oil get a windfall, while every one else scrambles to make up the difference. And the windfall isn’t really that useful because there is only so much spending the oil producers can do that will be productive to them. The rest is excess cash that has to be recycled back into the economy in some way.

The last time this happened, the petrodollar windfall was initially spent on such useful things as oil pipelines, then Rolls Royces and finally ice skating rinks in Bahrain. There were still billions left over after that, and the excess went into western banks. Banks can’t make money unless they lend it out (this was before the $1.50 ATM fee was created), and those petrodollars were frittered away on bad loans, largely to Latin America.

The real difficulty here is that there really aren’t any fiscal or monetary tools that work to combat this. Decreased demand for oil, increased refining capacity and greater efficiency in the use of petroleum would all help alleviate the troubles ahead, but there is nothing any elected or appointed official can do. Interesting times may lie ahead.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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