Rising oil price causes inflation!

Economics Economics Questions
1

It’s depressing how few people understand inflation and why prices are rising. Check out this article on Investopedia, there’s no mention of printing money causing rising prices.

http://www.investopedia.com/ask/answers/06/oilpricesinflation.asp

Also a few weeks ago I heard an “expert” economist talking about the possibility of QE3. He said the fed wouldn’t launch QE3 unless oil prices got up to $140 a barrel. He said if oil prices got that high the economy would weaken and the fed would need to begin QE3. Duh. Oil prices are high BECAUSE of QE. Amazing …

2

They have a different view of inflation than the austrians do. In mainstream terms higher general prices= Inflation

It’s a difference in terms, not a sign of ignorance.

3

It is a sign of total ignorance even according to mainstream’s terms.

4

How so?

5

DD5, I have been waiting for a reply and whether or not you have seen the message I really don’t think that you understand exactly what you’re saying.

A large increase in input prices causes a “supply shock” and a leftward movment of the aggregate demand curve. This will lead to an increased price level at any level of output, and so assuming that aggregate demand remains constant there will be an increase in the price level. Inflation, as defined by “Principles of Economics” (Case, Fair, Oster), an economics 101 textbook, is “An increase in the overall price level” . Indeed in its explanation it talks about rising fuel costs and natural disasters. Also, I remember back when I took the college board’s AP macroeconomics fuel shortages were the primary cause of supply shocks in questions where they ask about them. Please tell me what part of this is ignorance in the mainstream view?

6

There is no “supply shock”. There is no sudden sharp decline in oil supply. To my knowledge, there is no decline at all.

That’s right, and unless the total supply of goods in the economy decreases, only a monetary induced change can cause all prices to rise. Given that we are not witnessing here some temporary but acute fall in the total demand for money (The opposite has actually occurred), the only cash induced change that can occur is due to the increase in the money supply.

7

What matters isn’t the actual supply it’s the price which is demanded for it. In neoclassical models an increase in input prices will, in the short run drive up costs and increase the price level. In mainstream models there are things besides an increase in the money supply which can lead to inflation.

8

You said “supply shock”. Get your story straight. Never mind that whatever you said up there didn’t make any sense.

The price of oil can rise without a change in supply due to an increase in demand for oil. That’s right. But if more money is spent on oil, then less money must be spent on something else, and a rise in prices for oil would be accommodated by a fall in prices for other things.

It is a matter of simple arithmetic really. No change in supply and a rise in price means more money spent. There is no other way. Not even according to mainstream.

10 apples at $10 each totals $100 in total demand.

10 apples at $12 each totals $120 in total demand.

Where did the more money ($20) come from?

What mainstream models? Sources please. Don’t give me financial and monetary cranks like those in that article.

9

“You said “supply shock”. Get your story straight. Never mind that whatever you said up there didn’t make any sense.”

I used mainstream terminology that any economics 101 graduate should be able to understand. A supply shock is defined as " supply shock is an event that suddenly changes the price of a commodity or service"

By wikipedia

And as

“an event that suddenly changes the price of a commodity or service.”

http://www.investordictionary.com/definition/supply-shock

In the book I referenced above it states (In reference to a leftward shift in the short run aggregate supply curve otherwise known as an increase in the price level or overall prices) “This can be caused by an increase in wage rates or energy prices… Shifts like these that are brought about by a change in costs are referred to as cost shocks or supply shocks”

The problem with your response above is that you were talking about the supply of oil in and of itself, not the price of oil or the oil supply in economic terms. Oil prices are rising because of increases in uncertainty as to the future of the middle east and the future supply of oil. This means that a higher price is charged overall, and because oil prices are linked to almost everything in the economy this leads to an overall increase in prices, or inflation in the main stream sense.

My story never change, you simply misunderstood it. Supply in economic terms is

“Supply is the amount of a good or service available at any particular PRICE.” According to

http://www.economist.com/research/economics/searchActionTerms.cfm?query=supply

This is relevant because the actual supply, the physical supply of oil does not matter, that was an irrelevant point, what matters is that you cannot buy oil for less than the rising price

I don’t think that it’s ignorant according to mainstream definitions, I think you don’t understand mainstream definitions.

“The price of oil can rise without a change in supply due to an increase in demand for oil. That’s right. But if more money is spent on oil, then less money must be spent on something else, and a rise in prices for oil would be accommodated by a fall in prices for other things.”
In the long run, but not in the short run before prices can adjust, and also if the price of oil rises and its an input price to those other things then their prices cannot fall any further than the new input price will allow them to.

"It is a matter of simple arithmetic really. No change in supply and a rise in price means more money spent. There is no other way. Not even according to mainstream.

10 apples at $10 each totals $100 in total demand.

10 apples at $12 each totals $120 in total demand."

The simple answer is that all else equal less is demanded, in this case it comes out of other things which would have been consumed, but the general price level will still rise if input prices are high, such as in this case. If it costs 10 bucks to produce something, but prices keep rising then the price cannot fall, period. Fuels are an important input cost in transportation of goods and labor, as well as heating, so they are built into the prices of production as well as life itself.

“What mainstream models? Sources please. Don’t give me financial and monetary cranks like those in that article.”

I’m under the impression it’s all of them. I already cited a definition for inflation above and I believe that my definition of a supply shock has to have satisfied all questions. Inflation= General rise in the price level. Positive Supply shock= A sudden rise in the costs of a good, in terms of the aggregate supply of goods and services this includes important input prices, one of which is oil. Thusly a decrease in the economic supply (the amount provided at any one price) of oil caused by an increase in uncertainty in the middle east will lead to an increase in costs of production and the price level.

To give you a link

http://www2.hmc.edu/~evans/chap2.pdf

Now you see that upward sloping line on the first page? When input prices rise that goes upward, or to the left, and this means that the price level increases, prices get larger, and so there is inflation

“Rising PRICES, across the board”

http://www.economist.com/research/economics/searchActionTerms.cfm?query=Inflation

I reaaallly hope this satisfies.

10

You’re still not getting your story straigt. Is there or is there not a decrease in the oil supply? (don’t reply, this is for you to ponder upon). I have said enough already.

11

https://forum.freecapitalists.org/t/oil-price-rises-and-qe2/18566

12

No you haven’t. I haven’t been saying that the model is right, I’ve been saying that it is different and that thinking rising oil prices cause inflation is not ignorance, just a different definition. You have done nothing to show it isn’t ignorance.

13

Neodoxy, I think you’re not even getting the use of supply shock right. Because if I go from my knowledge on microeconomics (intro course, mind you) the supply curve for the market wouldn’t go up, but that only happens in a couple of scenerios (oligopoly/duopoly, something in relation to the factors of production make it hard for more firms to enter the market to increase supply, or existing firms having issues with the same as the second option). But there’s nothing to suggest this is inflation in the proper use of the term.

14

Neodoxy: "They have a different view of inflation than the austrians do. In mainstream terms higher general prices= Inflation

It’s a difference in terms, not a sign of ignorance."

I agree that they are using a different definition of inflation, they are defining inflation as a general rise in all prices. But they are still completely wrong even using their definition. They are saying that the main cause of the general rise in prices since 1970 is the cost of oil. That’s pure bullshit. The only cause is from printing money. All you have to do is look at commodity prices for 40 years before 1970 and 40 years after. 1970 being the year we went off the gold standard.

15

I am more than willing to accept that I’ve made an ass of myself, and I have a lot of respect for you, but I don’t believe that I have. The only way that one could consider that I have been using the term “supply shock” wrong is that supply shocks are usually sudden and you could (successfully) argue that the increase in oil prices are not sudden. But this does not change what is happening. Just as one of the the final link that I cited states

“An increase in any category of costs will tend to shift the aggregate supply curve upwards. This might include costs of raw materials, transportation or energy costs, labor costs, or even business taxes.”

This upwards increase in the short run aggregate supply curve will move the curve towards a higher price level. And as I have already cited numerous times an increase in the price level or overall prices, is called inflation.

I think that where you’re running into difficulty is that you’re thinking of microeconomics, which does put a lot of stress on imperfect competition. What we are talking about is a macroeconomic issue.

http://www2.hmc.edu/~evans/chap2.pdf

Page 4 of the link

16

Yes, a higher price of oil applies upward pressure on other prices. However, all prices – including the price of oil – go higher for another more fundamentally powerful reason altogether: printing money like there’s no tomorrow. Saying that the price of oil is the reason for higher prices is like saying that the bullett is the reason for the victim’s death.

The ignorance exposed by the OP has nothing whatsoever to do with the differing definitions of inflation.