August 18, 2005

HERE BE NO DRAGONS:

Costly Gasoline: Inflation Foe?: Expensive energy can make it harder to boost prices on other goods. Some say that should make the Fed more cautious in raising rates. (Bill Sing, August 18, 2005, LA Times)

How can expensive energy limit inflation? It can make it harder to boost prices on other goods and services. With more of their budgets going to gasoline, consumers have less to spend on other stuff. And that means sellers must think twice before raising prices — on products as diverse as T-shirts at Wal-Mart Stores Inc. and computers at Dell Inc. — even if higher energy bills are driving up their costs.

By cutting into sales of gas-guzzling sport utility vehicles, higher pump prices contributed to the recent steep price discounting by the Big Three U.S. automakers, suggests John Lonski, chief economist at Moody's Investors Service.

"That's a prime example of where higher energy prices can rein in core [non-energy] inflation," Lonski said.

In addition, energy price increases don't have the same inflationary effect as two or three decades ago, in part because the economy is relatively less dependent on energy. And when adjusted for inflation, energy prices are lower than two decades ago.

Also, fiercer competition has limited businesses' ability to raise prices.


Except that gas prices are artificially high.

Posted by Orrin Judd at August 18, 2005 6:51 AM
Comments

That's fine for the discretionary stuff, they'll just go out of business if they can't raise prices to cover expenses. But people will pay higher prices for the essentials, because they have no other choice. And that is where inflation really hurts, in the essentials. Ya gotta eat, and ya gotta have clothes, and ya gotta repair the roof on your 6000 square foot mini mansion. Not to mention booze and cigarettes.

Posted by: Robert Duquette at August 18, 2005 11:12 AM

None of which are affected.

Posted by: oj at August 18, 2005 11:15 AM

Food not affected? Construction materials not affected? You just aren't paying attention.

Posted by: Robert Duquette at August 18, 2005 11:47 AM

"Except that gas prices are artificially high."

This from the guy who says they should be set higher by greater taxation.

Posted by: Raoul Ortega at August 18, 2005 11:48 AM

Raoul:

Yes, exactly. They need to be much higher for us to start reaping the rewards of less fuel consumption. A temporary price spike driven by speculators won't do it.

Posted by: oj at August 18, 2005 11:51 AM

Robert:

No, they just can't pass on their costs.

Posted by: oj at August 18, 2005 11:55 AM

Food prices will be. You can't grow corn or haul it to market without burning diesel.

Posted by: joe shropshire at August 18, 2005 11:58 AM

oj: you truly are a riddle wrapped in an enigma posing as a conundrum... and you are absolutely correct about the necessity of higher oil pricing to spur conservation and development of alternative energy solutions.

i hope when the current bubble subsides you'll be out front on the taxation issue.

Posted by: lonbud at August 18, 2005 12:12 PM

Once your business fails, inflation disappears completely. No income, no outgo. Therefore, no problem.

Wonderful.

Posted by: Harry Eagar at August 18, 2005 12:38 PM

joe:

After enough years of will be you'd think you'd be past that notion.

Posted by: oj at August 18, 2005 12:42 PM

Harry:

It's pretty amusing the way you hate Darwinism the only place it works.

Posted by: oj at August 18, 2005 12:44 PM

Watch out. Pointing out that logically Darwinism should apply to human endeavors too will get you labeled a fascist and Nazi.

What.....

Oh, right. Nevermind...

Posted by: Raoul Ortega at August 18, 2005 3:14 PM

Darwinism is what it is, love/hate is irrelevant.

You seem to hate profits, though. Odd.

Posted by: Harry Eagar at August 18, 2005 5:16 PM

Nope, it's all about what you love and what you hate.

Profits are great, but competition reduces them. Good for consumers, not so great for badly run businesses.

Posted by: oj at August 18, 2005 5:20 PM

"Expensive energy can make it harder to boost prices on other goods. Some say that should make the Fed more cautious in raising rates."

News flash:

Economists pull theories out of their posteriors to support whatever policies they wish to see.

Posted by: Glaivester at August 18, 2005 10:47 PM

I thought everyone knew by now that inflation is always and everywhere a monetary phenomenon. The change in price of various goods as result of increasing or decreasing supply and demand have nothing to do with inflation.

Posted by: carter at August 19, 2005 12:29 AM
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