I would appreciate if a few of you would clarify if I’m correct on this assumption. Yet again, I’ve read in the financial papers (UK) that inflation has risen due to oil price costs climbing and filtering through to the consumer via petroleum expenditure for motor vehicles.
Having started to study the basics of Austrian school economics, I thought that inflation was only caused by growth in the money supply and or credit, and that rising oil prices were a consequence of inflation not a cause.
If you could please clarify if I’m correct or if I haven’t grasped this please could you put me on the right path.
As always, thank you all for any help you can give.
Many thanks. I am aware of Mr Hazlitt and have read ‘economics in one lesson’. However, this in-depth work you quote looks very interesting. I’ll have a read!!
Two definitions of inflation: monetary inflation contributes to rising oil prices, which contribute to consumer price inflation. The mainstream media uses “inflation” to mean consumer price inflation, while the Austrian school usually uses it to mean monetary inflation (and is usually careful to distinguish between the two when both phenomena are being discussed).
Quite simply, prices have risen due to expansion of money and credit. If you price oil in terms of gold, which is a fairly inflation-resistant commodity, you find that oil prices have remained rather constant over the past few years:
Rising oil prices can indeed cause many other prices to rise, with a static money supply, when the rising oil price is driven by reduced supply, not higher demand. Reduced oil means reduced production. The same amount of money chasing less goods will cause rising prices.
Of course, this isn’t what’s happening in Britain right now. The Pound is going to complete crap. I expect it to be the first major currency to blow up.
Given the debt problem in Europe (which now, apparently, includes Austria), I think the Euro will be the first to go. As these countries go bankrupt, the ECB will be forced to intervene and the euro will depreciate at very dramatic rates.
Honestly, I think it’s the Yen. The Japanese Central Bank has specifically stated that they are trying to fight deflation and keep injecting more and more money into the economy.
In regards to Austria, I think the problem is that it’s a major creditor to many Eastern European countries, which are themselves risking default (so, it would be similar to the position of the United States in the early 1930s).
I don’t think that there has been a leap in demand since 2008, or that there was really a fluctuation of demand in 2008 (when prices were virtually cut in half, on average), and neither was their a massive fluctuation in supply. I am saying, of course, consumer demand. Could it not be said that it was a bubble? There was probably high investor demand, which seems to be reestablishing itself (with the commodity and security bubble being formed).
You were the one that claimed it was because of monetary policy, not I. Any good statistician would know that you need to take into account all factors, not just your pet ones.
I was also the one who showed how oil prices in terms of gold have remained constant. Gold is a commodity with a stable real demand and a slowly growing supply.
Take this into consideration:
So production remains close to constant and since gold is such a durable good, most of the gold produced for the last century is still in existence. So we have a slowly growing supply and demand, which is relatively constant, between 2004 and 2007. Yet prices for gold nearly doubled during that same time period. Prices for other precious metals followed a similar upwards trend to gold.
If you look at other measures that could indicate monetary expansion, like the price of the GBP, you see that the GBP has been strongly downtrending against the AUD, EUR, CAD, CHF, JPY, and other strong currencies. In fact, the GBP is down over 20% against each of these currencies since 2005.
The point I am making is simply that prices are a factor of the currency supply, the supply of the good, and the demand for the good (demand being both a measure of available savings that people have to spend on the good and the desire to spend savings on that good as opposed to everything else someone could spend his/her savings on).
For all I know, the price of oil is going up mainly because people are moving savings out of other assets/investments and into oil and gold, at this point in time, resulting in a faster rise in demand than the supply of the goods. I haven’t really done much research on it, because well, there is nothing I can do about it, and I don’t have any money to invest. So people should probably listen to you.
I would be wary of quoting prices in gold as though gold has a nearly constant demand/supply, thus being able to infer characteristics of supply/demand in other goods, based upon their exchange ratio. There are a number of forces that actively seek to push the gold price down or make it more volatile. They likely do such at a loss, but this doesn’t mean they can’t operate perpetually if they have alternative funding sources (central banks and governments do).
With government bonds (and other interest rates) pushed to ultra-low returns and a very uncertain stock market and governments printing money at fast paces, I would guess that many investors have moved into commodity speculation. Both oil and gold are likely seeing “increased” demand.
Of course, on the other hand, there is likely speculation about “climate change” legislation that will tax a large portion of oil sales.
Looking at prices in Dollars (a larger market) more closely reflects this. Oil moved from ~$40 to ~$70 from January to August, while gold bounced around $950. Since that time, oil’s price has remained static, while gold has broke $1200, but has since moved down to $1100.
Monetary inflation may be the main cause, but it’s so murky. We don’t know exactly who has the money when, and what they will spend it on. Many people think inflation should appear across all goods at the same time. In the long-run that’s almost true, but not in the short-run.
