Dan Lynch offers this graph:
 |
| Graph #1 |
"Definitely a correlation after OPEC kicked in," Lynch says. After 1973, I'm thinking.
Sure. Two major spikes in prices (red) match up well with two major oil price spikes (blue). And after those two spikes, there seems a lot of similarity between red and blue on the graph. Not always the size of the movements, perhaps, but definitely the direction of those movements.
On the other hand, the similarity between the red and the blue is not obvious in the years before 1973.
That's okay... That was Dan Lynch's point, I think. His graph shows the similarity after OPEC kicked in.
Yeah.
Again, Dan Lynch:
That said, prior to OPEC, inflation was largely influenced by employment (which is probably a reflection of how close the economy is to capacity). So in the 60's what little inflation existed was driven by employment/capacity.
Now I have a problem. Usually, I think, the explanation given for inflation in the 1960s and before OPEC is the war in Vietnam. Or, the combination of wartime spending and the war-on-poverty spending of President Lyndon Baines Johnson. Taken together, the spending on Vietnam and poverty could be considered to have pushed the economy toward capacity or beyond, so that inflation resulted. In other words, Dan Lynch's explanation of the pre-OPEC inflation is pretty much the standard explanation of the pre-OPEC inflation.
That's not the problem.
The problem is, you have to argue about capacity, dedicate yourself to capacity as a problem, and describe inflation as the result of bumping up against capacity... and then you have to suddenly change your mind and say no, no, not capacity, now oil is the cause of inflation, the price of oil.
I don't do economics that way. The cause is the cause. You don't drop one explanation and adopt another every time the wind changes direction. If you do you're describing results, not causes.
What happened to capacity, after the oil price spike? The economy went downhill:
Before the early 1970s, our standard of living doubled every generation and a half. Now it will take twelve generations for our standard of living to double!
- Ross Perot in United We Stand, 1992
Surely, capacity was no longer driving inflation! Now, instead, oil is given as the cause of inflation. The trouble with that is, all through the 1960s the general price level was rising, but the price of oil wasn't rising. So when OPEC kicked in, perhaps the increase in the price of oil was only to get oil back even with other prices again. Not my idea. It was on the news.
I heard once, during one of the gasoline-price spikes of the 1970s, that OPEC was just raising prices to make up for the declining dollar. Never heard that again, which I thought was really odd.
I recreated Dan Lynch's graph at FRED. He shows "percent change from year ago" for both oil and inflation, but he shows one on the left axis and one on the right. I want to put them together on the same axis. You get a better comparison that way.
Also, his graph runs from 1960 to 1991. I want to see more years -- especially more early years. Oh, and I want to see the original numbers. Dollars per barrel for oil, and the CPI number for the CPI.
Okay, I looked at that. There's too much of a gap between the lines. I can't see similarities and differences. So I decided to set both series equal to each other, back at some early date.
I did the "Index" data transformation for each series, setting the November 1948 value to 100 for oil and for inflation. Now the two lines are close. Identical, in November 1948.
Then, to get a better look at the early years, I ended the graph in January 1974, just as the OPEC price hikes were making an appearance:
 |
| Graph #2: Inflation (red) and the Price of Oil (blue) Spot Oil Price copyright, 2014, Dow Jones & Company. |
From 1958 to the blue spike at the right end of the graph, the price of oil clearly lagged behind the rising price level. Finally, in 1974, OPEC had enough of that. They raised the price of oil.
Now... What shall we say was the initiating cause of inflation? What was the prime mover? What was the original cause of inflation? Oil?
No.
Oil was a result.
10 comments:
I think it is important to consider the closing of the gold window in 71 or 72. I think any correlations pre gold window and post gold window need to be considered almost as separate entities. Im not sure its even relevant to compare those graphs to be honest. . We created a different financial world post gold window closing. The correlation between an important commodity and inflation rates would look very different if a govt had a fixed vs a floating exchange rate.
The closing of the gold window was a response to deteriorating conditions. It was a result, a contributing consequence. What is necessary is to reverse the initial condition that created the cascade of deteriorating conditions. Anything else is only an attempt to solve results.
1971, August 1971. Only a few years after they reduced the silver content of U.S. coin. Both events were part of the trend of deteriorating conditions -- part of that trend, and result of that trend. What is necessary is to find the event that was NOT a result of the trend. The initiating event. The root cause of the trend of decline.
(Excessive reliance on credit.)
Not sure what your point is, Greg. Graph #2 ends in January 1974. If it ended in July 1971 (while we were still on gold) it would look much the same. Are you saying that the spike in oil prices was the result of going off gold?
Art -
I pretty much disagree with your whole line of reasoning here.
I don't do economics that way. The cause is the cause.
That is absolutist thinking. Just because something may be true in some time and place, it must be true always and everywhere? Sorry, no. And must particularly not in econ, where there are many confluences of potential causes, with levels of contribution that vary over time: capacity, productivity, wages, monetary policy, demographics. And I don't think it can be disputed that commodity prices play a roll in inflation. When commodities are cheap, that roll is tiny and its variations scarcely matter.
In the case of oil, it's index value goes to 400, and later to over 1500. The world of 1980 could not simply cut off it's oil dependence. Here's a scatterplot of your graph #2, with the last spike point removed. Over that time span, the relationship is roughly linear.
https://research.stlouisfed.org/fred2/graph/?g=26vI
Here it is extended to the end of the data set in July, 2013.
https://research.stlouisfed.org/fred2/graph/?g=26vU
If one can accept that the price of oil indeed affects inflation, it's clear that that effect is not consistent in the post war period.
Back to graph 1. In the mid 70's spike, oil is no later than concurrent with the rise inflation, and clearly leads the decline. In the ca '80 spike, inflation leads the rise by quite a bit, but oil leads the decline by quite a bit. From '85 on, the motions are essentially concurrent. So I don't think the data supports this statement: "Oil was a result."
Cheers!
JzB
As commodities go, so goes global inflation?
JzB:"In the mid 70's spike, oil is no later than concurrent with the rise inflation, and clearly leads the decline. In the ca '80 spike, inflation leads the rise by quite a bit, but oil leads the decline by quite a bit. From '85 on, the motions are essentially concurrent. So I don't think the data supports this statement: 'Oil was a result.'"
You completely misinterpret the statement 'Oil was a result.'
To the extent that inflation is "self-perpetuating" -- this is the argument that lies behind the 'wage-push inflation' argument, for example -- to that extent (a vast and valid extent, I think) inflation has ONE cause, and many consequences, many contributing consequences.
Oil was a contributing consequence. Oil was a result. Did it take on a life of its own? Sure. But: What gave it life? That is the question.
(Excessive reliance on credit.)
So, did reliance on credit sharply decrease from June 1980 until August 1983 - the big crash in inflation? Actually, no. It decreased from '78 through '82, then reached an all time high as inflation was falling dramatically. Even coming into the great recession, inflation doubled before plummeting while the growth of credit was cut in half. Except for about '60 to - '71 and ca '02 to '06, motion between CPI and TCMDO is almost perfectly contrary.
https://research.stlouisfed.org/fred2/graph/?g=26HI
Maybe TCMDO is the wrong measure. It indicates exactly the opposite of your premiss.
Where have I gone wrong?
Cheers!
JzB
"Where have I gone wrong?"
You are talking about how inflation in the mid- and late-1970s is not related to X.
But X is my idea of what got inflation on the increase in the early- and mid-1960s.
I said: Did [inflation from oil] take on a life of its own? Sure. But: What gave it life? That is the question.
I do not deny that the mid- and late-1970s "spikes in prices (red) match up well with two major oil price spikes (blue)" on Graph #1 above. I do not deny that "after those two spikes, there seems a lot of similarity between red and blue on the graph. Not always the size of the movements, perhaps, but definitely the direction of those movements." I say in the post essentially the same thing you said above. We agree on that.
But inflation since the mid 1970s is not the focus of my concern. The question is NOT what caused inflation in June of 1980. The question is what caused a downtrend to turn into an uptrend in the early 1960s.
In the years after World War Two, inflationary peaks were getting smaller and smaller. In the years from the mid-1960s to the early 1980s, inflationary peaks got bigger and bigger. The question is: What caused this change?
Whatever it was -- I think it was excessive reliance on credit, but whatever it was, it is something that started happening in the early 1960s AT THE LATEST.
That's what you don't seem to see, from my perspective.
n the years after World War Two, inflationary peaks were getting smaller and smaller. In the years from the mid-1960s to the early 1980s, inflationary peaks got bigger and bigger. The question is: What caused this change?
One difference that seldom seems to get any attention is the use and then abandonment of commodity buffer stocks as a hedge against price volatility. I come across the occasional passing mention of it, like this one but I haven't seen a detailed description of the programs.
n the late 1960s and 1970s, this buffer stock policy was dismantled and rendered ineffective by US policy-makers, as Kaldor noted with dismay after the first bout of 1970s stagflation:
“… the duration and stability of the post-war economic boom owed a great deal to the policies of the United States and other governments in absorbing and carrying stocks of grain and other basic commodities both for price stabilisation and for strategic purposes. Many people are also convinced that if the United States had shown greater readiness to carry stocks of grain (instead of trying by all means throughout the 1960s to eliminate its huge surpluses by giving away wheat under PL 480 provisions and by reducing output through acreage restriction) the sharp rise of food prices following upon the large grain purchases by the U.S.S.R. [in 1972–1973], which unhinged the stability of the world price level far more than anything else, could have been avoided.” (Kaldor 1976: 228).
"Are you saying that the spike in oil prices was the result of going off gold?"
Hey Art, sorry to take so long to respond but I have been pretty busy. But to answer the above question; Yes.... partially.
Our reason for going off the gold standard completely, as I understand it, was to stop foreigners from getting gold. We had already closed the domestic conversion to gold but had retained it as an international peg. Then some international creditors came a calling'. BTW it was accurate to be concerned about "ability" to pay and not just "willingness" back then because what international creditors wanted was your gold. If you didn't have it..... you were broke. France was the one that pushed us I believe, Ive seen DeGaulle mentioned before in discussions of this matter, but they would have been just the first if successful.
So what do you do when someone changes the rules like that? The ROW was transacting with us and suddenly we stop promising gold and simply say you'll just get more dollars if you come to "redeem" your holdings of US financial assets. Well you try to make it more expensive for them. The ROW in the 70s didn't have much power over the US except to make our oil fetish more expensive. It was an expensive and correct decision for us. The gold standard was stupid and our advantages over ROW then were even more than today. Those advantages were harder to overcome under a hard money/goldstandard world but floating exchange rate world leveled the plying field some. We had to do it to prevent Fort Knox from being emptied but it cost us.
Post a Comment