iTulip regards IMF chief economist's view of oil / inflation link as specious?

[Guest]

November

the soaring cost of energy? How can that be inflationary?

if there were a constant money supply - there is no inflation. If the energy prices go up, goods will reprice relative to one another - but there will be no inflation.

the value of paper money will fall quite rapidly. This is a great argument for nominal increases in equity prices and commodity prices ... an argument for historically high oil prices regardless of "peak oil" and so forth.

I'm left wondering how is it I come across multiple IMF chief economist references to "oil spikes quickly translating into high inflation" yet this idea seems greeted by the mainstream views of this community as a mere oddity (contradicts some kind of Misesian orthodoxy)?

Sounds like a rather large difference of views between the "conventional" senior economists at the IMF and the expressed opinion on the matter I've read here at iTulip? Also, it appears the IMF view on the link between petroleum prices and inflation has considerable support elsewhere among other "conventional" economists too?

I understand the exclusively financial theory of inflation prevails here at iTulip, and I have a persistent sense that it is incomplete and adhering too rigidly to a "school of thought" on sources of inflation. It may be that Janszen and others here have a more subtle, porous, multi-faceted conception of the potential sdources of inflation, but I have not heard it once expressed to encompass petroleum being in any way autonomously an inflationary input in it's own right.

How comfortably does this theory co-exist with the fact that for iTulip to be talking sense on this question, the IMF chief economist must be talking non-sense? Which one is correct? How outlandish an idea could it be, that a healthy dose of genuine scarcity-driven price action is a major driver of petroleum prices, and that such price action feeds directly into generalized consumer prices worldwide?

I'm left feeling somewhat like a character in Alice in Wonderland, as reading comment here to the effect inflation is always and everywhere an exclusively monetary phenomenon leaves me wondering whether it's prudent of us to simply assert the IMF chief economist is talking right through his hat?

Here is a short collection of excerpted quotes relative to interviews with the IMF chief economist, whereby I conclude the he seems to regard an absolute price of petroleum as a *significant* component of inflation. What are we all missing which he perhaps sees?

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http://www.finfacts.com/irelandbusin..._1011520.shtml

Inflationary pressures

The IMF is also still concerned about inflationary pressures. While such concerns have taken a backseat in advanced economies since the recent bout of financial market turbulence, inflationary risks are more immediate in emerging market and developing countries. Here, rising food prices, dwindling spare petroleum capacity, continuing high oil prices, and still strong foreign exchange inflows may mean that monetary policy needs to tighten further to contain inflation pressures.

Global oil markets also remain very tight, and with spare capacity still limited, supply shocks or heightened geopolitical concerns could lead to further oil price spikes that could quickly translate into higher inflation.

_________

http://www.thestar.com/Business/article/285728

Credit crisis to slow global growth, IMF says

The global oil markets remain very tight, and with spare capacity still limited, supply shocks or heightened geopolitical concerns could lead to oil price spikes that could trigger higher inflation, economists said.

_________

http://www.taipeitimes.com/News/worl.../13/2003356479

The importance of US to Asia as destination for exports is declining

Inflationary pressures across the region remain generally well contained, the IMF said, with monetary tightening -- and currency appreciation in some countries -- having limited the second round impact of oil price increases last year.

_________

http://www.pia.gov.ph/default.asp?m=...ate=10/21/2007

Philippines to sustain economic growth under low inflation, International Monetary Fund (IMF) said

Inflationary pressures are likely to pick up in the face of rising oil and food prices in the global market

_________

http://www.newsvine.com/_news/2007/1...t-solid-growth

IMF Sees Slower — but Solid — Growth

Another risk to the global economy comes from gyrating oil prices. In the United States oil surged to $87.61 a barrel, setting a new closing high on Tuesday.

If skyrocketing oil prices were to fan inflation pressures, it would complicate the job of Federal Reserve Chairman Ben Bernanke and other central bankers who are dealing with slower economic growth or other fallout from the tight credit situation.

_________


Threat of $100 crude raises global alarm

By Ed Crooks in London (Financial Times)

Published: November 21 2007 19:54 | Last updated: November 21 2007 19:54

Oil hovered on the brink of $100 a barrel on Wednesday. Mixed data on US crude inventories did not quite push it over the threshold. But the world is having to accustom itself to the idea of a three-figure oil price. The implications for the health of the world economy are troubling.

“Until recently, there has been less concern about oil in the $90s than there was when it was $60 or $70. But it is obvious that oil at $100 is going to have much more impact than oil at $70,” said Daniel Yergin, chairman of Cambridge Energy Research Associates.

“Over the next few weeks, we are going to see these prices flowing through to US consumers, at a time when we have other serious economic problems.”

Simon Johnson, the International Monetary Fund’s chief economist, shares that concern. “We have a potential collision between a 21st century financial crisis and a good old-fashioned 1970s oil shock,” he said. “There is the potential for a ‘perfect storm’.”

Until now, the world economy has defied the soaring price of recent years, delivering the strongest global growth for decades.

In April, the IMF set out an explanation that made a distinction between whether the oil price rise was caused by shortages of supply or strong demand. A demand-led price rise, driven by rapid expansion in emerging economies such as China and India, could be accompanied by stronger global growth, it argued.

However, Mr Johnson suggests the rise towards $100 is starting to look more like a supply shock.

Although there has been no serious disruption to oil supplies, the market has begun to price in the risk of such problems, whether in the short term as a result of a US attack on Iran, or in the medium term as a result of insufficient investment by the industry.

The IMF’s economic model suggests that a 10 per cent rise in the price of oil takes 0.1-0.2 percentage points from global growth. So a rise from the average price of $75 a barrel for next year – assumed by the IMF for its latest economic forecasts – to an average of $100 might cut world growth from its predicted 4.8 per cent to a still-healthy 4.1-4.5 per cent.

However, Mr Johnson says this calculation may underestimate the dangers of $100 oil at a time when the world economy is already threatened by the credit squeeze.

“The oil price rise is a serious inflationary shock, putting upward pressure on inflation in the US, the eurozone and other economies. That makes it much harder for monetary policy to react appropriately to what we presume is a credit crunch,” he said.

The heads of both the US Federal Reserve and the European Central Bank have issued warnings recently of the risk that rising prices for oil and other commodities will push up inflationary expectations, and of the need to prevent higher inflation becoming entrenched.

That constraint on their response to the credit squeeze, says Mr Johnson, risks making a global slowdown “deeper and more prolonged”. Strong demand for oil from emerging economies, particularly China, compounds the problem. Economic slowdown and a high oil price will curb demand in developed countries, putting downward force on the price and helping to relieve the pressure on consumers.

But if demand in China and the oil-producing countries – which have been responsible for most of the recent growth in consumption – remains strong, the oil price is more likely to stay high.

Saudi Arabia, the biggest oil producer in the Organisation of the Petroleum Exporting Countries, is concerned about the risk of global economic slowdown and wants prices lower.

Ali Naimi, the kingdom’s oil minister, said last week: “We do not wish any country to go through a recession, particularly the biggest consumer in the world [the US]. We are not planning for that to happen.”

He may be able to push through an increase in Opec’s production levels at the cartel’s meeting in Abu Dhabi on December 5, if he can overcome opposition from Iran and Venezuela. That would help cool the oil market. But while tensions between the US and Iran remain high, the threat of supply disruption and a further run-up in prices will remain.

“There is still a risk of a serious supply shock. We have not really had one. We’ve had fears, and small supply interruptions, but nothing really serious,” said Mr Johnson. “So this situation is quite precarious.”

[Rajiv]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Quote:

Originally Posted by Rajiv if there were a constant money supply - there is no inflation. If the energy prices go up, goods will reprice relative to one another - but there will be no inflation.

I'm left wondering how is it I come across multiple IMF chief economist references to "oil spikes quickly translating into high inflation" yet this idea seems greeted by the mainstream views of this community as a mere oddity (contradicts some kind of Misesian orthodoxy)?

Sounds like a rather large difference of views between the "conventional" senior economists at the IMF and the expressed opinion on the matter I've read here at iTulip? Also, it appears the IMF view on the link between petroleum prices and inflation has considerable support elsewhere among other "conventional" economists too?

I understand the exclusively financial theory of inflation prevails here at iTulip, and I have a persistent sense that it is incomplete and adhering too rigidly to a "school of thought" on sources of inflation. It may be that Janszen and others here have a more subtle, porous, multi-faceted conception of the potential sdources of inflation, but I have not heard it once expressed to encompass petroleum being in any way autonomously an inflationary input in it's own right.

What I said was "If the money supply was constant" But in the world of today, it is not. That is what Itulipers are talking about. The response of the central banks to the oil price increases will be to print more money -- and that will cause the inflation. Under the "Gold Standard" and a fixed supply of gold -- there would be a massive redistribution of income -- which would cause massive unrest -- hence the need to print money and create new bubbles -- of course - When the Federal Reserve Act of 1913 was passed -- so too was the Income Tax Act of 1913 -- the idea being that printing money should not be rewarded, but rather that the profits (interest) from that Act should be taxed and redistributed. However both those Acts have been totally bastardized - and are not serving the purposes for which they were enacted.

[FRED]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

What I said was "If the money supply was constant" But in the world of today, it is not. That is what Itulipers are talking about. The response of the central banks to the oil price increases will be to print more money -- and that will cause the inflation. Under the "Gold Standard" and a fixed supply of gold -- there would be a massive redistribution of income -- which would cause massive unrest -- hence the need to print money and create new bubbles -- of course - When the Federal Reserve Act of 1913 was passed -- so too was the Income Tax Act of 1913 -- the idea being that printing money should not be rewarded, but rather that the profits (interest) from that Act should be taxed and redistributed. However both those Acts have been totally bastardized - and are not serving the purposes for which they were enacted.

Indeed. The Fed likes to pretend that the oil price is rising due to demand factors alone. But surely someone has to print the money that's used to pay for the oil.

[Guest]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Rajiv -

You are one of those here who's ideas regarding the implcations of resource depletion are closest to my own. So we should find a lot of congruence in our outlooks. Here are some questions I've asked around here, which have been greeted by a conspicuous lack of response from any quarter.

I must conclude our contributors by virtue of their notable silence, must all regard these questions as merely wrong?

Here are some questions that have gone unanswered:

> Is there such a thing as a rising real price of petroleum? If not, why does the lead economist of the IMF refer to it?

> Is the fact that the UAE has accrued massive cash reserves explained entirely by the inflation of the unit of measure in which their acquired petrodollars are denominated?

> If the UAE's huge cash hoard is merely an illusion due to a shrinking dollar, why are they so wealthy now in comparative purchasing power? Compounding of their original holdings from a decade ago seems invalid as the primary reason, as oil consumer countries with comparable reserves ten years ago did not remotely follow the same upward trajectory in growth of their wealth.

> Why was an open reference made on this website back in 2000 - 2001 to the petrleum embargoes of the 1970's "causing massive inflation" - a notion easily to be found in references in many other articles and viewpoints, yet now this idea has been "culled" entirely from these pages?

> Why does the process of inflation require a "grand unified theory" where all inputs lead inexorably back to issuance of money? Why cannot inflation be a messy progression in the real world, with various completely unrelated primary inputs?

> Is the soaring CRB chart as mapped on a sxty year time frame merely a lockstep mirror of central bank monetary policies? If not, is there room for potentially significant fundamental causes for soaring commodity prices?

> If there is no room in the views around this community for fundamental inputs upon commodities. i.e. "real" rising energy prices, as opposed to inflationary manifestations, how does this community explain the impact of 3 billion people industrialising upon raw materials demand as a "minor factor" in relation to the monetarily driven inflation of commodities prices.

> In summary, how do you think iTulip could best synthesise an understanding of inflation today, above and beyond a "purist" viewpoint that the only significant analysis of inflationary inputs is at the level of monetary aggregates?

> Do you personally consider this reductive, monetarily derived view defining the full scope of inflation in the 2000's to mere currency action, limited in it's horizons? Is such a conceptually purist limitation justified?

> Or is the iTulip viewpoint regarding the sources of inflation beyond monetary aggregate inputs in fact subtly inclusive of fundamental drivers, e.g. large industrialisation, emerging resource scarcity, ect., except that the references to those factors have merely escaped me? If those references are around here somewhere, why are they not in evidence?

> Is there such a thing as a substantial inflationary input from rising real petroleum prices, and if not, why do the IMF and other "conventional" economists fall into this misconception?

I'd really appreciate iTulipers (and iTulip - in it's public pages!) clarifying this also, ideally without any wiggle room or ambiguity on the definition of single or multiple inflationary inputs.

Until now, I have not encountered a single scrap of a reference on this website other than EJ's very earliest writing, acknowledging a real, substantial, independent input into inflation from rising petroleum prices, or from any other commodity. They have been silently rolled up entirely into the "grand unified" inflationary thoery of monetary causes. Either iTulip is right in this omission, and the IMF economist is incorrect, or he is right, asnd iTulip is incorrect. Which is it to be?

It would be very refreshing to read some simple unequivocal answers that to reconcile these disparities.

This entire website's main topic, the main course every day, is inflation. How can you discuss this and not have clarified this potentially large issue first and foremost?

Are there any fundamentally driven causes of a rising CPI other than monetary inflation? Overpopulation? Resource depletion? Massive industrialisation? Peak "cheap" oil ? Anything other than mere money issuance at all?

[c1ue]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

> Is there such a thing as a rising real price of petroleum? If not, why does the lead economist of the IMF refer to it?

There can be, but the question is how much of the present price increase is "real"? 10%? 50%? the actual number is very important. Secondly I thought as the 'Guerrilla Stock Master' you would already realize the IMF is a thinly veiled front to the world banker set. Everything they say must be viewed as coming straight from that socio-economic group.

> Is the fact that the UAE has accrued massive cash reserves explained entirely by the inflation of the unit of measure in which their acquired petrodollars are denominated?

The UAE's increase in cash hoard is not difficult to understand. With the concept of 'oil mercantilism', the fact is that the low (native) populations along with overall past low consumption means that the millions of barrels of oil sold pretty much go straight towards to UAE bank account. This consumption picture is now changing, but the currency pile itself does not prove anything regarding inflation or real petroleum price increases.

Or how would you explain China? Where clearly product prices via labor were driven into the ground?

> If the UAE's huge cash hoard is merely an illusion due to a shrinking dollar, why are they so wealthy now in comparative purchasing power? Compounding of their original holdings from a decade ago seems invalid as the primary reason, as oil consumer countries with comparable reserves ten years ago did not remotely follow the same upward trajectory in growth of their wealth.

This is a rewording of above questions. A giant pile of dollars unspent, even if eroded by some inflation, is still a giant pile of dollars.

As you might have noticed, at present there is a credit crunch. Does this not mean that cash is at a premium given general previous dependency on credit?

> Why was an open reference made on this website back in 2000 - 2001 to the petrleum embargoes of the 1970's "causing massive inflation" - a notion easily to be found in references in many other articles and viewpoints, yet now this idea has been "culled" entirely from these pages?

Because the previous theory is now well documented. Economists now are almost (as much as they ever will be) in agreement that the fundamental problem in the 1970's was erosion of dollar purchasing power as evidenced by outflows of gold - culminating in the termination of Bretton Woods. It is just no longer sexy to talk in the news about M1 or M2 or Mx.

> Why does the process of inflation require a "grand unified theory" where all inputs lead inexorably back to issuance of money? Why cannot inflation be a messy progression in the real world, with various completely unrelated primary inputs?

Inflation doesn't require a grand unified theory, but it is very likely that there are relationships between various economic areas/behaviors and inflation. It is just that the process is too complex to easily quantify, yet the results are observable in retrospect. As for messy, good economists actually don't assume linear progressions - but they do assume causality.

If your thesis that causality in economics is false, then hundreds of years of thought and observation are incorrect. This I am unsure of.

> Is the soaring CRB chart as mapped on a sxty year time frame merely a lockstep mirror of central bank monetary policies? If not, is there room for potentially significant fundamental causes for soaring commodity prices?

Once again, you confuse several issues with a single lovely chart.

Price inflation itself is not necessarily bad; as the pool of products/productivity and population grows, so too should the money supply. What was once 100 man hours and $1 which today can be created via 10 man hours should not necessarily still only cost $1, especially if there is a web of secondary suppliers who enable this productivity increase.

Therefore it is important to separate inflation above and beyond product/productivity and population increase - which the 60 year CRB chart does not do.

> If there is no room in the views around this community for fundamental inputs upon commodities. i.e. "real" rising energy prices, as opposed to inflationary manifestations, how does this community explain the impact of 3 billion people industrialising upon raw materials demand as a "minor factor" in relation to the monetarily driven inflation of commodities prices.

The impact of 3 billion people industrializing does have an impact, but this impact is not instant. Furthermore the industrialization is not self sustaining - it requires outside money.

As I've said many times, industrialization through mercantilism as Japan/Taiwan/S. Korea have done is simply impossible when the country(ies) in question are much larger than their customers.

Thus your assertion that 3 billion people industrializing will suck up all possible free resources and drive up prices forever makes an inherently dangerous assumption that these non-self-sustaining economies can continue to grow either because they become self sustaining or that their present inflow of FDI continues.

Why is it not possible that the sources of financing - i.e. the 1st world now - will stop their external funding of said industrialization simply to pay for the 1st world's own increasing commodity costs?

And this is without nationalist/malicious intent.

> In summary, how do you think iTulip could best synthesise an understanding of inflation today, above and beyond a "purist" viewpoint that the only significant analysis of inflationary inputs is at the level of monetary aggregates?

I won't speak for others, my own view is a short term (5 year) spike due to previous underinvestment and unexpectedly rapid growth, but soon to be moderated by 1st world economic distress.

> Do you personally consider this reductive, monetarily derived view defining the full scope of inflation in the 2000's to mere currency action, limited in it's horizons? Is such a conceptually purist limitation justified?

> Or is the iTulip viewpoint regarding the sources of inflation beyond monetary aggregate inputs in fact subtly inclusive of fundamental drivers, e.g. large industrialisation, emerging resource scarcity, ect., except that the references to those factors have merely escaped me? If those references are around here somewhere, why are they not in evidence?

> Is there such a thing as a substantial inflationary input from rising real petroleum prices, and if not, why do the IMF and other "conventional" economists fall into this misconception?

Nothing is ever that simple.

Neither in your first nor second nor third statements.

The reason why larger events are difficult to predict is that there are many large motivated constituents pushing for different outcomes.

China, India, and the mercantile 3rd world are pushing to grow themselves into modern nations.

The US is pushing to sustain an ultimately unsustainable lifestyle.

Europe and Japan are pushing to sustain possibly sustainable lifestyles, but in turn are forced look outward for resources and/or demographic support.

The Gulf nations are pushing to maintain the traditional government and religion in the face of tremendous outside cultural pressures and internal dissatisfaction (overall, not necessarily the 'natives').

It is a complex interplay for which the economic impact of commodities is actually only a tool.

[Rajiv]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Yes - resource depletion and population growth are very important determinants of whether humans will survive on this planet -- we have borrowed heavily from future generations, and the time to pay the piper is almost here (that is my belief.)

In an ultimate sense you are very correct -- all current sources of energy (other than solar, or solar derived) are ultimately resource limited -- but the question is -- over what time span. The question is can the world transition to a lower per capita use of energy in the current economic paradigm -- my reading of Hudson, EJ, and others is that the current FIRE economy will fail miserably. Other economic paradigms may be able to manage the shift more gracefully. I think the question of inflation/disinflation/deflation is trying to answer the question as to what form will the collapse take.

If suppose, shortage of oil leads to a shortage of food production (a near certainty) -- then what assets will people sell to buy that food. So the price of certain assets is going to fall, to pay for the food, and the price of food is going to rise relative to that asset.

So if we were to base inflation only on a basket of food, and energy (and in my opinion that is all it should be based on -- for that is what it takes to continue life) then yes a shortage of oil will lead to inflation in $ terms. But in this case if I were to define money to be a barrel of oil - then there would be price deflation -- in other words, each barrel of oil would be able to buy many more assets than before -- though probably not any more food.

When we look at the historical relationship of gold (the historic unit of money) and bread, we find that the price of bread remained constant in terms of gold for four centuries until the twentieth century when bread became much cheaper. But this relationship will not return, because today the real unit of money is a barrel of oil -- (more properly a unit of energy a kwh or perhaps a megajoule of energy)

[Guest]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Excellent replies from C1ue and Rajiv.

I particularly note the comparison of petroleum to the 'new money'. This is almost certainly, going to be a very, very, very large topic in the next twenty years. But Rajiv's definition is sleight of hand too! Because if the real price of petroleum indeed soars, and it's energy input cost causes all goods prices to soar, we are dodging the question of it's inflationary effect upon conventional money, by calling it the "new money" !!

It may not interest anyone else. But I'm fascinated, to the point of obsession, with the extent which a soaring real price of petroleum going into shortage could affect every single global manufacturing input cost in the next couple of decades.

I would be sincerely grateful if at least 20, but better if 50 iTulipers put down their opinions of the definition of inflation here, so that iTulip editors will have a rich collection of varying inputs defining what many of us readers think inflation looks likely to consist of, in this new, increasingly resource constrained century.

Please - won't some of you chip in your most careful thoughts on whether the 'all monetary, all the time' definition of inflation seems sufficient to you as you look out at our 6.5 billion people, and dwindling energy to keep the industrial story going as it has for the past 200-300 years?

Imagine that what you define here is what will defend you in a court martial - you have to define your terms carefully enough, that no-one can find you wrong! A collective basket of such carefully considered definitions could shed a lot of light on what iTuliper's think. We can for example take note of the majority and minority of viewpoints! And I am hoping that C1ue and Rajiv will further refine their own comments into the most reductive, easily graspable definition.

For now, the most trenchant comment I've found yet is the notion of 'oil as the new money'. What does anyone else think? Won't you please contribute your own viewpoint?

[Guest]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Seems there are no contributors here with the slightest interest in nailing this issue to the floor?

I repeat my question - is there such a thing today, in 2007, as a rise in the real price of petroleum, and if so, how does it's increased real cost input into 80% of all goods and services worldwide not exert an upward pressure upon the CPI?? Answers to the effect that "it's complicated so there is no real answer", are mere evasions of the point.

Now turn around and notice iTulip treats this everywhere as a manifestation of monetary abuse alone. What do you think? Do you have your own ideas on this, as distinct from those you've read here?

Monetary abuse alone is to my view clearly an incomplete explanation. Rajiv and even C1ue indirectly acknowledge the components of inflation are "complex". Well, all I am asking for is a clarification of whether that "complex causes of inflation" includes the real price of petroleum within it? Rajiv implies it does. C1ue declines to commit to a clear response.

There seems an elaborate lack of interest (even from Grapejelly, who's original blanket statement to the contrary prompted these questions). Why is everyone so coy on the answer to such a simple question? One way or another, finding out the truth behind this simple question might offer quite valuable guidance on a host of investment notions, even presuming one does not give a damn what happens to society and is merely fixated upon one's own investments to the exclusion of all else.

Does anyone know (or care) whether the real price of the energy you use to run your life or plan your future is rising or not? Just how passive or complacent are you all on this question?

If no one wishes to answer out of genuine disinterest for the question, then this little community is more a drawing room full of mannered followers of a percieved iTulip orthodoxy than it is a community of people genuinely interested in what's contributing to inflation - why? Because you all talk about inflation incessantly anyway.

Grapejelly - you offered up a sweeping statment that oil prices have "nothing to do with" inflation. Would you care to substantiate it, or are you merely saying "trust me"??

This post is not about whether you "like" me or not as a poster here. Declining to substantiate a larger point (are there sources of inflation push beyond the monetary abuse) for that reason alone would be juvenile.

This post is asking you to clarify, for the benefit of us all, a notable "grey area" I see repeated here passively by many as "accepted wisdom" - that rising prices of any goods are a always and only a manifestation of abused currencies, with little insight to be gained on the fundamentals governing the rise of price of those goods beyond that?

Do you know, or do you even care, whether petroleum's real price is rising, and if so, why you might wish to understand the full reasons for that before you go on to post further copious reams of other opinions about inflation elsewhere on these pages?

[FRED]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Seems there are no contributors here with the slightest interest in nailing this issue to the floor?

...whether petroleum's real price is rising, and if so, why you might wish to understand the full reasons for that before you go on to post further copious reams of other opinions about inflation elsewhere on these pages?

"Real" means "inflation-adjusted" as in "independent of monetary expansion."

What is your question?

[Guest]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Fred -

Why is it that not a single person wants to venture an opinion in reply to such a simple question? I have three notions why.

A) Nobody is really sure of the answer (surprising).

B) Boycott any replies due to vexation with me for posting any suggestion iTulip might be wrong on some (any!) point. (that's just silly).

C) Significant apathy on the topic of petroleum prices (very dull curiosity quotient indeed, given our impending circumstances).

Whatever the reason for the "deafening silence" on this question - evidently the possibility that real, inflation adjusted petroleum prices may be rising at least in part because the stuff is becoming genuinely more valuable is regarded as an outright foolish idea around here today.

But no-one seems quite sure enough of their ground to tell me so in so many words. My question was referring to the real, inflation adjusted price of petroleum.

The question was: Is there such a thing today, in 2007, as a rise in the real (inflation adjusted) price of petroleum, and if there is such a real cost rise, how does it's increased real cost, which gets input into 80% of all goods and services worldwide, not exert an upward pressure upon the CPI?

Currency debasement (inflation) of the denominating currency USD is what, 40% in seven years? Oil "price" before adjusting for inflation is up 350%+ in those same years? Why is everyone here claiming one is merely or solely a factor of the other?

I've read some circumstantial arguments as to why, but those arguments did not appear to me definitive arguments at all. Let's employ EJ's recommendation to "take a straightforward look out the window" to gather some immediately observable data with our own eyes: All it takes is a cursory look around the world to note that the "getting of petroleum" is a matter of some sharply increasing concern to many players.

In light of that fact, where does this unqestioning assumption come from that if the currency has debased by 40% and oil risen by 300%, the oil's price rise is merely a factor of the currency's fall?

Can you set me straight? I regret that Grapejelly is declining to clarify this insight for me, although he made the original assertion as though it was a given fact.

[Rajiv]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Inflation is defined

as the increase in the price of some set of goods and services in a given economy over a period of time. It is measured as the percentage rate of change of a price index.^[1] A variety of inflation measures are in use, because there are many different price indices, designed to measure different sets of prices that affect different people. Two widely known indices for which inflation rates are commonly reported are the Consumer Price Index (CPI), which measures nominal consumer prices, and the GDP deflator, which measures the nominal prices of goods and services produced by a given country or region.

Mainstream economists overwhelmingly agree that high rates of inflation are caused by high rates of growth of the money supply. Views on the factors that determine moderate rates of inflation, especially in the short run, are more varied: changes in inflation are sometimes attributed mostly to changes in the real demand or supply of goods and services, and sometimes to changes in the supply or demand for money. In the mid-twentieth century, two camps disagreed strongly on the main causes of inflation (at moderate rates): the "monetarists" argued that money supply dominated all other factors in determining inflation, while "Keynesians" argued that real demand was often more important than changes in the money supply.

Related concepts

Related economic and inflation concepts include: deflation, a general falling level of prices; disinflation; hyperinflation, an out-of-control inflationary spiral; stagflation, a combination of inflation and rising unemployment; and reflation, which is an attempt to raise prices to counteract deflationary pressures.

In classical political economy, inflation meant increasing the money supply, while deflation meant decreasing it (see Monetary inflation). Economists from some schools of economic thought (including some Austrian economists) still retain this usage. In contemporary economic terminology, these would usually be referred to as expansionary and contractionary monetary policies.

Role of inflation in the economy

In the long run inflation is generally believed to be a monetary phenomenon while in the short and medium term it is influenced by the relative elasticity of wages, prices and interest rates.^[2] The question of whether the short-term effects last long enough to be important is the central topic of debate between monetarist and Keynesian schools. In monetarism prices and wages adjust quickly enough to make other factors merely marginal behavior on a general trendline. In the Keynesian view, prices and wages adjust at different rates, and these differences have enough effects on real output to be "long term" in the view of people in an economy.

A great deal of economic literature concerns the question of what causes inflation and what effect it has. A small amount of inflation is generally viewed as having a positive effect on the economy. One reason for this is that it is difficult to renegotiate some prices, and particularly wages, downwards, so that with generally increasing prices it is easier for relative prices to adjust. Many prices are "sticky downward" and tend to creep upward, so that efforts to attain a zero inflation rate (a constant price level) punish other sectors with falling prices, profits, and employment. Efforts to attain complete price stability can also lead to deflation, which is generally viewed as a negative by Keynesians because of the downward adjustments in wages and output that are associated with it. More generally because modest inflation means that the price of given good is likely to increase over time there is an inherent advantage to making purchases sooner than later. This effect tends to keep an economy active in the short term by encouraging spending and borrowing, and in the long term by encouraging investments. High inflation, though, tends to reduce long-term capital formation by hurting the incentive to save, and to effectively reduce long-term spending by making products less affordable. Deflation, by contrast, leads to an incentive to save more and encourages less short term spending potentially slowing economic growth.

[Guest]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Rajiv -

Actually my question was not "what is the definition of inflation" but rather "is the real price of petroleum rising, and if so, how does that affect the CPI"?

My entire suggestion is that if the real price of petroleum rises over the coming years, the energy input into all goods and services will rise in lockstep with that real energy input cost.

This is not a "what is inflation" question. It is a "what will powerfully affect the CPI" question.

As petroleum's nominal price has risen 350%+ in less than a decade, we can surmise that some good part of that rise was NOT purely created by the shrinking of the currency denominator (currency inflation) - in which case, even another 100% or 200% further real rise in the cost of petroleum would provide a massive new input for rises in the CPI index of all countries around the world.

How would that then not have inflationary consequences, since it's impossible that governments would be able to counteract that rising CPI, brought on by a geological depletion event, merely by employing "tight money"? Indeed it would appear they would be far more likely to "accomodate" this geologic dwindling of cheap oil by adopting looser monetary policies, no?

[ And where is FRED's response, and Grapejelly's, let alone anyone else's? ]

[DemonD]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

[Spartacus]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

looks more like a mule than a horse

Or maybe the newfoundland pack horse.

Definitely not an Arab or a Clydesdale, is my point ....

[Rajiv]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Lukester,

I sympathize with your frustration around this issue. $inflation, debt inflation, will go hand in hand with petroleum deflation (petroleum as unit of money)

However, the issues you are talking of go much deeper than that -- the optimists (relatively speaking) at this site hope that a transition from petroleum to other alternative energies will ameliorate the decline in oil production -- and ameliorate the negative outcomes that you and I fear.

I on the other hand think that the current economic system will be unable to transition -- and the economic terms that we are bantering about will become meaningless. What we have to transition to -- is a new economic system -- and that to me is the real value of Itulip -- sharing my thoughts on alternative economic paradigms -- and pointing out gaping flaws in the current one.