Source: Fortune
Summary
Despite the common narrative that higher oil prices lead to inflation, the relationship between the two is not causal. Instead, inflation is a monetary phenomenon, driven by changes in the money supply. Historical examples, such as the US and Japan’s experiences during the 1970s oil crises, demonstrate that inflation is more closely tied to money growth than oil prices. The current state of affairs in the US suggests that if the rate of growth in broad money is controlled, higher spending on oil and gasoline will be offset by lower spending on other items, restraining overall inflation.
Our Reading
The numbers tell one story.
The article’s author argues that the narrative surrounding oil prices and inflation is misguided. By examining historical data, the author shows that inflation is more closely tied to money growth than oil prices. The examples of the US and Japan during the 1970s oil crises highlight the importance of controlling the money supply to prevent inflation. The current US budget deficits and potential for accelerated money growth are also noted as potential contributors to future inflation.
One original observation: The article’s focus on the money supply as the primary driver of inflation suggests that policymakers may be able to mitigate the effects of higher oil prices on inflation by controlling money growth.
Author: Evan Null
