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Robert Samuelson: It's Not Your Dad's Oil Story

Roundup: Media's Take




We have all the telltale signs of an inflation breakout: a big jump in oil and energy prices; an increase in the price of gold, often an inflation hedge; a low unemployment rate (5.1 percent in September, despite Katrina) that could push up wages. To anyone old enough to remember, the situation seems eerily reminiscent of the 1970s, when oil prices soared and inflation reached peaks of 12.3 percent in 1974 and 13.3 percent in 1979.Well, folks, it ain't gonna happen this time.

Here are three reasons: (1) The Federal Reserve won't let it happen. The Fed would tolerate a recession before again permitting inflation to go bonkers. (2) The economy has become vastly more competitive since the 1970s. It's harder for companies to raise prices, because they face imports or low-cost domestic rivals. (3) Productivity has also improved since the 1970s, helping companies absorb some cost increases without raising their prices ("productivity" means "efficiency" and is measured by output per hour worked)....

Because we think that higher oil prices caused double-digit inflation in the 1970s, we fear it could happen again. The trouble with this impeccable logic is that the underlying facts are wrong. High oil prices didn't cause the 1970s' double-digit inflation; they simply made it slightly worse. Look again at those peak CPI numbers: 12.3 percent for 1974 and 13.3 percent for 1979. Now, look at the figures without the effect of energy prices: 11.7 percent (1974) and 11.1 percent (1979). Or consider this: in the 1960s, well before any oil "shock," inflation went from 1 percent to 6 percent.

"People make a mistake when they attribute inflation [mainly] to oil prices," says Hamilton. "It was what the Federal Reserve was doing before the oil shocks that made for inflation." What the Fed was doing was following easy money and credit policies. The economy repeatedly "overheated," creating a stubborn wage-price spiral and pervasive inflationary psychology. Countless economists, left and right, have concluded that oil prices were not the principal inflation culprit.

Still, the myth endures. It's apparently indestructible. Why is this? One reason is that it's a simple story; it's easy to understand and remember. Better yet, it puts most blame on foreigners—those "greedy" oil exporters. It plays to our victimhood. Inflation wasn't our fault; it was what others did to us. A second reason is that we confuse a rise in our "cost of living" with the onset of higher inflation. Although the two concepts are related, they're not identical....



Read entire article at Newsweek

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