Saturday, October 4, 2008

Oil prices do not create inflation

So says a new letter from the Fed Bank of San Francisco

Should make sense. Here's some BLS CPI data:

Any influence total inflation seems to have on core inflation seems small at best. Admittedly, this includes food prices as well, but energy prices have been jumping over the past several years, and the chart, to some extent, should account for that.

And Mark Thoma on why we use Core Inflation:
.... this paper finds that predictions of future inflation based upon core measures are more accurate than predictions based upon total inflation.

Hat-tip to Economist's View.

1 comment:

J Thomas said...

When I look at your link, it seems they're looking at inflation that doesn't include energy or food prices. (And it looks like the reason they want to leave energy and food prices out of their inflation measure is that those are 'volatile', meaning they go up too fast.)

They found that an increase in oil prices causes nonfood nonenergy prices to go up in europe, but not in the USA.

It makes logical sense that increased oil prices ought to make other prices go up, for everything that oil is used to make and transport. What's going on in the USA that keeps the logical thing from happening?

Here's one possibility. Maybe a significant part of the things that go into CPI are imported from foreigners who're dumping them on us. The price of oil in the USA has no effect on the price of those imports, if anything affects those prices it would be the price of oil in the exporting country.

And that might be enough to take a result that's statistically significant in europe and reduce it in the USA to something less significant.