Oil price change does not cause inflation. According to AG business doesn't have pricing power. When non-discretionary factor input costs like oil rise discretionary spending must fall, since without pricing power the added costs can't be forwarded. According to the school of demand management a fall in demand reduces inflation. ECRI is a firm believer in the school of demand management. Thus, ECRI can't decide whether rising oil price is inflationary or deflationary.
A model induced paradox <g>
I considered oil (energy costs in general) as a basic cost input effecting production at almost every level. And compounding. Ignoring inflationary/deflationary aspects, I proposed it would act as a tax, or drag on the overall economy, regardless of pricing power.
Shortly after the recovery of the price of oil, the price of premium beer went up. I expected that was because the market would bear the higher cost, and the cost of making it, the bottles (packaging), of transporting it to market, of keeping it cold all increased. Later on, you have the boxboy requiring a wage increase to cover the higher heating costs of his apartment and gasoline to get to the store.
The early drop in oil prices may have given the US a boost, which subsequently reversed, and even now the cost increases trickle through to the consumer. Lately, it's been butter, potatoes and onions that have increased in price. I suppose butter can be substituted out, but potatoes and onions are pretty basic goods. I suspect that the price increases were delayed until the new crop worked it's way into the picture, with associated higher costs attached.
There may not be much pricing power in luxury yachts or motorhomes, but I seem to see it in staples that form a big part of most household budgets... |
